When the economy crashed just over ten years ago, many pointed the blame at subprime mortgages. These loans, approved for buyers with bad credit and no income verification along with an interest rate and payment that increased by one percent every six months, grew from 5 percent total originations (35 billion), in 1994, up to 20 percent ($600 billion) in 2006. The default on countless numbers of these loans beginning in 2007 at the start of the worldwide recession, was accused of triggering the worst housing crisis in memory. While several top economists deny claims that subprime loans were entirely responsible, one thing is true: subprime lending essentially ceased as foreclosures mounted.
What made these loans so popular for buyers over a decade ago?
FICO scores could be as low as 600 with no income verification, no down payment, and low-interest rates the first two years. At the end of two years, rates would spike every six months rising an additional two percent every year reaching eight percent or even higher within four years. During the loan process, buyers were told they could refinance before the two years were up, however, property values had not increased, resulting in no equity and loans now required proof of income.
According to Linnea Arrington, Founder and President of San Diego Funding, “two things happened basically overnight, stated income loans and no money down loans went away. With demand gone, prices stalled and went down and homeowners could not refinance out of their caustic adjustable rate loans since they did not have the income or equity to do so.”
In the last couple of years, subprime loans are making a comeback in the U.S., though buyers will find the once lax rules have changed. According to Arrington, today’s subprime loans, now referred to as “Alt” loans, require the following:
- Loans with little down require full qualifying (qualified mortgages)
- Most loans are 30 year fixed rate
- Owner occupancy and income are thoroughly verified
- Adjustable rate loans are fixed for 5, 7 or 10 years and the buyer must qualify for the fully indexed payment or higher, not a low starter rate
- Non-qualified mortgages require a larger down payment, usually 20% or more down
- Even mortgages called non-qualified must go thru much tighter qualifying than prior to the housing crash and they have 20% or more down payment
“Buyers will need to show the ability to make the payments, to prove they can afford the mortgage not only in a good year but in a bad year as well,” says Arrington. “None of us want to see another housing crash and today’s “non-qualified mortgages” are much more qualified than the loans of 10 years ago.”
Yet while interest in Alt loans may be growing, many buyers are not taking the bait. Arrington says that very few buyers are applying for these loans compared to the number of people buying homes. Instead, many buyers today are purchasing homes with all cash, taking banks out of the process altogether.
For additional information on Alt loans, as well as a variety of other services, from pre-approval, home purchasing, refinancing and real estate agent services, contact San Diego Funding, a full-service mortgage banker with a wide array of loan products to meet every situation. For more than 30 years San Diego Funding has remained one of San Diego’s most respected and trusted mortgage lenders serving the lending needs of homebuyers, real estate professionals and builders.