Most of the subprime mortgages I’ve originated have been for families who needed a "band aid" with their finances or credit.    Borrowers in a subprime situation tend to have troubled credit or finances due to either

1. Circumstance.  Life events that have happened beyond their control.  For example, illness, loss of employment, divorce, etc.
2. Habit.  Lack of financial discipline or responsibility.   History of the same behavior such as bounced checks, collections, late payments, etc.

The subprime mortgage is not intended to be "long term" financing.  It is temporary (often with a 2 or 3 year fixed payment period) and people with them need to be working on improving their financial situation so that when the prepayment penalty is over and their payment is about to adjust, i.e. that band aid is about to be ripped of their ouchie, the sting is not so bad. 

During the 2-3 commitment period of the subprime mortgage (there is often a prepayment penalty associated with these types of mortgages), I have encouraged my clients to work on improving their credit scores and making changes in how they spend and save money.   

Now is a great time to review your spending habits.  If you’re reading this now, you probably have a personal computer that came all ready equipped with programs like Quicken or Microsoft Money.  Begin by reviewing what you’re currently spending every day and decide where you can make better choices.    Do you absolutely need to have a double tall latte everyday?   Having a $3 coffee drink on your way to the office equals $780 per year!  (I’m only counting weekdays and one drink a day–if you enjoy an afternoon coffee break, the cost is of course, higher).   You should be able to notice spending that is not needed (need is different than want).   Creating and following a budget will greatly help you plan for your financial future.   Cutting back on luxury items, such as lattes or going out to lunch and dinner, will provide you with extra cash to pay down credit cards and other debts.   

Related posts:

Part 2:  Know Your Score

Part 1:  Do You Need to Be Concerned?

Filed Under: Subprime Lending

This is the beginning of my official "what to do if you have a subprime mortgage" series.  I truly want to help as many home owners as possible who have subprime loans get out a potential pickle. 

I’ve posted many warnings about the changes in the subprime market and lack of mortgages for consumers with credit scores under 620.   

The first step is…  determining IF you have a subprime mortgage.   The mortgages that are receiving a lot of attention in the press these days are 80/20 mortgages.   Not all are subprime.   

Here are a few questions to consider (you should dig out all the papers from  your last mortgage…this is important):

1. Do you have a prepayment penalty (this will be on your Note* and disclosed on your final Truth in Lending).   If you do have a prepayment penalty, when is the penalty period over?   Some slick loan officers might have told you that it’s "only a penalty if you prepay more than 20% of the principle" or they might have called it something like a "commitment period"…dig out your Note and check it out.   
2. How much time do you have before your rate is scheduled to adjust?  Again, this calls for you to dig out the Note* you signed at the escrow company when you obtained your last mortgage.   If you have less than one year before the rate adjust, please contact your Mortgage Planner for a credit review to make sure you’re on track.    Often times, the subprime mortgages are fixed for 2 or 3 years on the first mortgage.  If mortgage is subprime or not, please do check to see when your ARM (if you have a short term fixed rate) is scheduled to adjust.   
3. How much will your payment adjust?  Your Note will show you what your interest rate is based on.   You may either have an ARM or a balloon payment with your mortgage.   If your mortgage is subprime, the adjustments to your payment are typically steep.   Caps (the limit on how much your rate can adjust) will be on the Note.
4. If you’re unsure of questions, please contact your Mortgage Planner.  They can confirm whether or not your existing mortgage is "subprime".   Since you have your mortgage papers out of your filing cabinet and you have your Mortgage Planner on the phone, schedule an Annual Review of your mortgage to assess if it is still the right course for  you in light of the current market conditions.

So what if you do have a subprime mortgage?   In some ways, you might consider yourself lucky if you have taken steps to improve your credit and you can pay your debts on time you should be able to refinance when your prepay is up just fine. If times are tough and your mortgage and other bills are a struggle, you might be in for a rocky road with many of the mortgages that helped you buy your home no longer available and you should maybe consider steps such as budgeting and credit repair to help you be in a good position to refinance when the time is right with your mortgage.   (Actually, we should all budget and take care of our credit).

This is just the beginning of a series of posts to hopefully help families with subprime mortgages position themselves into permanent "a money" financing.  Watch for Part 2: (I’m not sure what it will be called, but I do know…it follows Part 1).

*Your Deed of Trust is recorded to secure the Note (promissory note).   The Note contains other details, such as prepayment penalties, than the Deed of Trust, which is recorded to become public record.   You should have received a copy of the Note (along with a stack of other papers) from the escrow company when you obtained your last mortgage.   Bottom line…dig out all of your papers and if you have to, contact your Mortgage Planner and provide it to them for review.   

Be proactive and responsible. Take the necessary steps to make sure you’re in a good place before your mortgage rate adjusts.