Wednesday, August 29, 2007

What Means "Subprime"?

"Subprime" is a term thrown about quite a bit these days. For the newbie, here's a rundown of subprime, Alt A and the others you're hearing about.

The Types

 Let's imagine a person. We'll call him Mr. Responsible. He looks like your Dad. business manHe's got a least 2 years of job history at the same company, making a decent wage and getting a satisfactory little raise every year. He's got 2 years of tax records at the ready. He's got money in the bank, enough to put 10% or 20% down payment on that home he's eyeing. Lenders salivate over Mr. Responsible. They give him a loan as fast as they can and call it a prime loan, or A paper loan.

 Now imagine another person. We'll call him Mr. Down-On-His-Luck. Girls, you might also know him as bad boyBad Boy #17. He's fun to date. Believe me, I've done it. But you wouldn't want to lend him money. That's because Mr. Luck  job hops. His idea of a savings account is checking under the sofa cushions. Tax returns? Yeah, he did some of those. Once. 10% down? It'd take years to save that much, and there's a drink special at the local watering hole tonight, so he'll start saving tomorrow. Mr. Luck is considered subprime, by mortgage lenders and wise women alike.

The exception is the young first time buyer. They often have so little credit history that they're assigned a low credit score and considered subprime by lenders. That's where the government and not-for-profit organizations like AmeriDream and the Maricopa County IDA Bond loan program step in. They'll still give newbies a home loan without considering a low FICO credit score. They'll often help out with the downpayment too.

Caught in the middle are the Alt A folks. They're often self-employed or otherwise have trouble proving their income.  Basically, if you're not Prime or Subprime, you're probably Alt A.

What's Going On Now 

Calling Prime Buyers! Got your tax returns, a steady job, and some money in the bank or equity in your existing home?  Willing to heave all that paperwork over the desk at your lender for scrutiny? Good. You'll probably still get a great rate on a good loan. Choose the home you buy wisely and plan to stay in it for 3+ years - you'll be just fine.

First time buyer finding yourself in the subprime category? If you're a first time buyer, or haven't owned a home in the past 3 years, call up a lender or two and start asking about FHA, VA and other special loans for first timers.  Then find a Realtor who says, "Yeah, I've done those loans before."

Subprime but not first time buyer? Well, let me recommend a couple of months of judicious savings and a visit with a credit counselor. Don't, under any circumstances, pay someone who claims s/he can 'remove' bad credit marks from your credit report. I've never met one yet who wasn't a con man.

Somewhere in between?  Call a few lenders. See what you can qualify for. Ask a Realtor to help you figure out how much house that monthly estimated payment will buy you. Skim the MLS or and see if you like the looks of what you can afford. If you like what you see, and plan to stay put in your new home for 5-7 years or more, go ahead! Despite the doom and gloom headlines, it's actually a good time to buy if you choose wisely.

Up Next: My Two Cents on the Credit Crunch.