This is a type of mortgage that is designed to help those who don’t quite fit into the strict guidelines the banks require. There is more flexibility with these and the interest rates typically fall in between hard money and mortgages offered by the banks.
There are a few reasons why someone might need a non-prime loan.
The most common reason is a problem with credit. These loans can be used when there is some specific item on your credit that the banks won’t work with, like bankruptcy, foreclosure, late mortgage payments or when your credit score just isn’t high enough to qualify for a bank loan.
The second most common reason to use a non-prime mortgage is due to an inability to prove income the way the banks require. This is specifically for self-employed borrowers whose income taxes don’t accurately reflect their ability to make payments.
Being self-employed for less than 2 years prevents you from qualifying with most banks but non-prime loans can often approve borrowers who have only 1 year of self-employment.
It is easy to see that there are advantages of non-prime loans. They are easier to qualify for than bank loans and they are normally cheaper and have longer terms than hard money loans. And if the property is your primary residence, there are no prepay penalties on them.
What about Subprime Mortgages?
Subprime mortgages have been replaced by non-prime mortgages. There were some serious problems with the old subprime mortgages that were blamed for the mortgage meltdown of 2008.
Non-prime basically took over the space where subprime used to be but with much better terms and qualifying.
Where subprime was known for the “stated income loan” that didn’t require any income documentation, non-prime requires proof of ability to pay. There are different ways of doing this but every loan has some way of showing the ability to make the payments.
Another big difference is the prepay penalty. The most common subprime loans had a 30-year loan with a fixed rate for 2 years and a 2-year prepay penalty. At the 2-year mark, the rate was set to increase enough to be a problem for the majority of borrowers.
With non-prime mortgages, there is no prepay penalty for owner occupied homes. The terms are different too. The 2-year fixed rate is gone and has been replaced with a 5-year fixed rate with an option for a 30-year fixed rate, still with no prepay penalty.
If you think a non-prime loan might be the right type of loan for you, fill out the contact form or give us a call.