How the 'Sub Prime' Meltdown Affects You
Joe Gladden, Captain, USN (retired)
Founder, VR SAM
We all hear the considerable media buzz about the "Sub Prime" meltdown and at VR SAM we receive lots of questions and concerns from our clients about how it will impact them and their home buying / selling decisions! As usual, the media hype scratches the surface of the issue so we thought we would ask a "True Expert" from the home finance industry to address this issue. In this article, Ms. Susan Wallace, Senior Loan Consultant, Carteret Mortgage, will shed light on this issue and what you can do to minimize the impact on you!
Here's the quick answer:
If you are using a VA loan to purchase your home, it won't.
Sub-Prime lenders do not buy or sell VA mortgages loans. Plain and simple.
Or, if you have good credit (680 and above), It won't. You won't be dealing with a sub- prime conventional loan.
VA mortgages are insured by the government. VA mortgages will allow 100% financing with a maximum loan amount of $417,000 and will still accept credit scores as low as a 580 with compensating factors such as good reserves (money in savings, TSP, mutual funds) or money down to name a few. VA loans are NOT CONSIDERED SUB PRIME LOANS.
What is a Sub Prime loan and what does it mean to you? Loans are extended to borrowers based primarily on four factors: Credit, Cash On Hand, Career and Collateral. The Sub Prime market consists of borrowers who have:
o low credit scores due to late payments
o judgments, liens and/or collections on their credit report
o little cash for a down payment and/or reserves after the transaction is completed
o unstable job history and/or low income requiring a ?stated income? program
o high loan to home value ratios which result in high debt ratios.
The Sub Prime borrower does not qualify for the standard conventional (Prime) or VA financing. Since loans to these borrowers are ?risky,? they will have higher interest rates and are often Adjustable Rate Mortgages (ARM?s) with high pre-payment penalties.
You may have heard that some home owners cannot afford their homes after the rate adjustment. There are several possible reasons for this. I cannot address all of them in this article, but here is an example. Some borrowers took ARMs with the intention of repairing their credit over the term of the ARM and then refinancing to a more favorable rate and more stable loan program. If they did not take the steps to repair their credit and qualify for a more favorable loan program within that time period, they became subject to the terms of that ARM. Generally, this resulted in a higher interest rate that increases their monthly payment. Now they cannot afford to make the payment. They have a 100% "Loan To Value" which combined with low credit scores prevents them from refinancing. In many cases, this forces the home owner into foreclosure. This is what is happening in the SUB PRIME Market.
The fall out from the high Sub Prime foreclosure rate is being felt throughout the industry?but it does not mean that you can't get a loan! As more and more loans are defaulting, mortgage lenders are forced to tighten up their lending standards across the board. Even conventional lenders to Prime borrowers are adjusting their guidelines to require higher credit scores for loans with less than 10% down. VA mortgages are still offering 100 oercent financing for borrowers who meet the VA guidelines. And although the standards are tightening, there are still 100% conventional financing options if the VA loan is not right for you.
The most important thing to remember whether you are using your VA loan option or standard conventional financing is achieving, maintaining, and protecting your good credit. The majority of your loan terms -- the interest rate, maximum loan amount, and conditions / terms of the loan - are based primarily on your credit score.
Because credit and lending standards are tightening across the board, it's a great time to get a "financial check up" -- You, as well as your friends, family members and coworkers need to choose a mortgage loan advisor who will talk to you about your short and long term goals and educate you on the market and loan programs available to you Then you can make an informed decision together. I strongly recommend you do this now even if you are not immediately in need of any home loan financing so you can be prepared for the future.