Subprime lenders specialize in offering financing to people with bad credit or riskier loans. Conventional lenders focus on low-risk loans and borrowers. While you’ll find better rates with conventional lenders, subprime companies offer more flexibility in loan requirements and terms.
Easier to qualify for
Subprime mortgages are easier to qualify for than traditional loans. Since these lenders are willing to accept a higher level of risk, they offer a variety of packages. For example, someone with bad credit can still find a 30-year mortgage with no down payment. You can also opt for a lower rate with an ARM or fixed-rate mortgage loan.
For jumbo or unconventional loans, you may need to work with a subprime lender. Since these types of loans are harder to sell on the secondary market, some conventional lenders won’t handle them.
higher rates
For the highest level of risk, subprime lenders charge a higher rate, usually a couple of points more than a conventional loan. You may also find more fees or points, especially if you want to waive prepayment fees.
Conventional lenders offer the best rates and reasonable fees. However, there is a wide range of rates and fees among lenders.
No matter what type of financing you choose, request quotes from dozens of lenders. This protects you from scams and unscrupulous companies, while also ensuring you get the best package. Finding a low rate is one of the biggest and easiest ways to save money.
Don’t worry about the PMI
Subprime lenders do not require private mortgage insurance (PMI), unlike traditional lenders. PMI can add more than one hundred dollars to your monthly payment.
It is required for conventional loans when the down payment is less than 20%. You can get around this requirement with conventional lenders by getting two mortgages from separate companies. Another option is to make a 20% down payment on your conventional loan, but take out a home equity loan after the deal closes to access your cash.
Just to make things more confusing, more and more conventional lenders are entering the subprime market. If you need subprime financing, continue to request quotes from traditional lenders, as you may still qualify.