March 19, 2007

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  NEWS: Lenders Tighten Up on Bad-Credit Mortgages

  Following the news that foreclosures and defaults are nearing an all-time high, lenders are making stricter standards on those loans considered high risks. Those would-be borrowers coming in with the bottom 10% of credit scores should still be able to get a mortgage, but should expect higher rates and tougher penalties – especially if they can't fork over a down payment.
  
  With the sub-prime mortgage industry experiencing major problems, experts have theorized that it would only be a matter of time before lenders had to change their standards. Previously, brokers shook their heads over the readiness of lenders to buy high-risk mortgages. These brokers were paid rich premiums to deliver poor credit borrowers, because the loans they qualified for were always profitable. Now, the consequences of those risks are playing out, and it just is not a good time for lenders.
  
  In response, rates on the most common type of sub-prime loan, called a 2/28, have risen. A 2/28 loan is fixed for the first two years of the loan, and adjustable beyond that for the life of the mortgage. The rate beyond the first two years is always high, usually around 10%. Most borrowers, however, do not keep the loan past the initial term, although they are usually locked in for at least that long by hefty prepayment penalties. Generally, after 2-3 years, borrowers have improved their credit some, and can refinance to get a better rate. Recent weeks have seen rates on this type of mortgage jump anywhere from 1.5 – 2%.
  
  Furthermore, some lenders are looking for higher credit scores right off the bat. Many have also adjusted their maximum loan amounts downwards, and are requiring bigger down payments.
  
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