SubprimeIf you¿re like the vast majority of the population, buying a home is the largest personal investment you will ever make.
You're buying something that¿s many times your yearly salary with the intention of holding onto that home for many years.
The
bank you're going to get the money from to buy that home knows that, too. And if you're going to get a mortgage on a home,
the bank wants to know how you're going to pay for said house.
Usually, you give a lot of paperwork to the bank, so
the bank can tell if you're able to afford the house or not. You give them bank statements, credit card statements, letters
from your employer stating your salary, tax returns, etc.
But, what happens if you may not be the perfect candidate
for the home of your dreams? Or, you're buying too much home (the bank thinks you can afford a $200,000 home, you want a $230,000
home). Or, you don't have the money for a down payment. Or, you haven't paid your bills on time in the past. Or, the documents
of how you make your salary are not 100% available.
Enter the subprime mortgage. Subprime mortgages are loans given
by banks to people who may fall under any one of those above conditions, or others. Why would anyone want a subprime mortgage?
Well, homebuyers get subprime mortgages because they get to buy the home they want. Banks give subprime mortgages because
they can charge people more money for that mortgage. Remember, the difference in interest rates on a $200,000 or $300,000
home can mean the difference between hundreds of dollars in interest payments.
Still there¿s risk for both the person
getting the mortgage and the bank granting it. When the playbook works, the value of the house rises. So, even if Joe Q. Badcredit
couldn't afford the house he bought in 2001, at last resort Joe or the bank could sell the home, make a bundle off its increased
value, and the bank could get its money back.
The playbook goes out the window, though, when home prices don't increase.
Then homeowners run the risk of defaulting and banks lose money. At its worst, homeowners can lose their houses.
If
you¿re in the market for a home, and the banker says you qualify for a subprime mortgage, it probably means you need to provide
more documentation of how you¿re going to pay for that house. Or, you may be buying too much home. Talk with your banker about
why you qualify for a subprime mortgage, and try to fix it.