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How to's and money-saving tips from resident homeowner and mortgage professional, Cathy West

What to do when looking for a subprime mortgage

Over the past several years, mortgage lenders by and large had one answer for consumers who wanted a home loan but had a mediocre or poor credit history: tough luck. When the economic downturn first hit, many lenders who had previously exercised rather lax credit requirements tightened them up significantly, and they haven't really budged in the nine-plus years since. However, some financial institutions are now starting to extend loans to more people with checkered borrowing histories, and that could mean subprime borrowers have a chance to buy these days.

Subprime lending is, of course, what helped cause the market's collapse in the first place, so it's understandable why even after years of economic recovery, many institutions are still reticent to let troubled borrowers back into the housing market. But some are now doing so as a matter of simple economics: Credit restrictions have been so tight for so long that the vast majority of extremely qualified buyers who wanted to buy a home have probably done so. Opening credit to those with lower credit scores will allow them to keep their originations moving along.

What does this mean for subprime buyers?
The thing that people have to keep in mind about subprime credit scores in the wake of the recession is that the financial problems people have experienced in recent years largely occurred through no fault of their own. Job loss, declining income, and the like can very easily lead to people falling behind on their bills, and suffering massive credit damage as a result. With the economy improving a lot over the past six years or so, more people are now starting to get back on their feet financially.

As a consequence, it's also important for hopeful buyers to remember that the financial principles that go into building the savings to make a sizable down payment are those that result in strong credit ratings. That's a goal they should continue to pursue even as they enter the mortgage process, because having good credit is always preferable. But when it comes to looking for a subprime mortgage, the best advice anyone can give is to shop around.

Why is shopping important?
Regardless of people's credit scores, applying with a few different lenders will help them find the best available rates, and give them an idea of what kind of deals they "should" get given current conditions. However, for subprime consumers, this is also important because a lot of financial institutions haven't yet branched out to this type of lending once again. As such, borrowers should expect to have their applications rejected by at least a few lenders in their mortgage search, but that should not dishearten them.

Consumers should always strive for the best possible credit ratings, but trying to get into the mortgage market as soon as possible is probably a good idea as well. Mortgage rates and prices are likely to keep rising in the near future, bringing affordability down considerably in the months to come.

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