The Sub-prime Mess: What Types of Real Estate Loans to Avoid

By: Kinan Beck

"Sub-Prime lending, which is also referred to as near-prime, B-Paper, and second chance lending, has garnered a great deal of attention recently. This is largely because this type of lending is considered to be risky for both the borrower and the lender and many people have felt the sting of a sub-prime loan that has gone awry.

What is Sub-Prime Lending?

Sub-prime lending is a type of loan that is given to a person that does not qualify for the best available interest rates. This is usually because the person looking to buy the real estate has a poor credit history and, therefore, does not qualify for a regular real estate loan.

Since sub-prime loans are given to those with poor credit histories, the interest rates on these loans are much higher than a standard real estate loan. This factor alone can make it more difficult for the buyer to repay the loan on a timely fashion. Since the person taking out the loan generally has a history of defaulting on loans or making late payments, there are additional risks involved with sub-prime lending.

Who Engages in Sub-Prime Lending?

Some lending institutions specialize only in sub-prime lending while others offer it as one more type of loan that can be provided to those looking to buy real estate. Therefore, if you are interested in a sub-prime loan, you have many options available to you.

Many critics of sub-prime lending believe that lending institutions that supply these loans are preying on desperate individuals and are taking advantage of a bad situation. Some critics believe that sub-prime lenders are deliberately seeking out people that will be unable to repay their loans so they can foreclose on the property and take it as collateral. Those that support sub-prime lending, on the other hand, maintain that these lenders are helping individuals buy homes that would otherwise be unable to make such a purchase.

Should I Take Out a Sub-Prime Loan if My Credit is Bad?

Taking out a sub-prime loan is risky and very costly. Since you will have to pay a higher interest rate than normal, you will ultimately lose thousands of dollars in interest payments that could have been avoided if you had waited to buy your real estate at a better rate.

Since you will be paying so much in interest when you buy a home with a sub-prime loan, you will also be putting yourself in a bad financial situation. If you are unable to repay the loan in a timely fashion, your home can be repossessed and your credit will become even worse.

Although you have been long looking forward to the day when you could buy your dream home, it is better to work toward rebuilding your credit so you can qualify for a traditional loan. In many cases, you can re-establish your credit in as little as one year by making payments regularly and on time toward your other debts. Using a credit card and paying it off in full at the end of each billing cycle is one of the best ways to accomplish this, just be sure the card reports to the major credit reporting bureaus.

Whether you think sub-prime lending is predatory or not, it is a poor financial move to make. Hold off on your purchase and you will put yourself in a far better financial position for the future."

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