Sub-Prime Mortgage Loans

If you are wondering why we are in a foreclosure crisis with home repossessions happening almost daily, it could be (and as a matter of fact many are convinced that it is) primarily due to bad credit mortgage loans and sub-prime debt. Of course, this whole situation didn’t happen overnight, but because of the high foreclosure rate, many are now examining exactly how it did actually happen.

Let’s look at what mortgage loan sub-prime debt actually is. Typically, the mortgage loans that are sub-prime or non-prime loans were granted to individuals with a poor credit history or with income-to-debt ratios that are out of normalcy. Normally credit scores that are rated “good” are mid-700′s and up. Income-to-debt ratios are calculated by taking your monthly income and dividing it by your mortgage payment (principal and interest) as well as your homeowner insurance monthly payment and your annual taxes broken up to a monthly amount. Usually, this ratio cannot exceed 35%-45% depending on what type of mortgage you are applying for (and there are many, including as much as 125% secured loans). So if you fall outside of these criteria you would be considered a sub-prime or non-prime loan candidate.

What forced the examination of why this happened was not only the foreclosure rate, but the lending practices of many of the lenders. It can be argued that they lent outside the parameters of what would normally be considered good lending practice, primarily out of greed. Then after the loans were made, they sold them in the secondary market to banks and other investors in the form of structured investment vehicles and credit default swaps. When these loans went delinquent it triggered all the foreclosures that are happening today. This situation now being compared with the Great Depression in the 1930s.

Of course, lenders can’t be blamed for all of it. We need to watch our borrowing habits and maybe think twice as to why we need to borrow. Sometimes, if we just pause and take a breath, we realize that we can wait until we have the money to purchase something that is a want and not a need.

So take a breath and rethink why you are borrowing, especially if you are in what would be considered the sub-prime category.

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