What does the Sub-Prime controversy mean to me? (And what does sub-prime mean??)

There is more and more news nationwide about the “sub-prime” mortgage market and how it has had a real impact on the economic climate. For something that most people never heard of before a few weeks ago, there sure is a lot of talk about it. Kind of like Paris Hilton - came out of nowhere and now we can’t escape!

The short answer is that “sub-prime” means very much what it sounds like. Some borrowers credit is not so great. Most lenders go by FICO scores, income, employment history and a few other variables to determine what interest rate a borrower can qualify for. When the lender determines the numbers don’t add to good news, a borrower may turn to a lender who specializes in making riskier loans - sub-prime loans. These loans will generally be at higher interest rates, may have rates can vary from month to month or both.

The idea in these loans is that after a couple of years, someone who had hit a rough patch in their finances would be back in a better position to refinance into a lower rate, normal loan.

What actually has happened, though, is that too many people who shouldn’t have been loaned mortgage money were and they have NOT gotten into a better financial position. Maybe they’re rate has now gone up and they can’t make the payment. After you’re late on your mortgage, it’s hard to get a new loan to refinance.

Property values in some areas stopped increasing at such a high pace and so now maybe their loan is for more than they can sell the house for. They’re stuck. And the companies who buy mortgage loans in huge portfolio bundles are faced with high default rates.

An altogether bad situation.

What is happening now, in true “closing the barn door after the horses are out” fashion, lenders are tightening up on their criteria and making more sensible lending decisions.

And to be sure, some innocent folks are going to be left out of the home-buying process. But it’ll all shake out. And in the meantime, this can be a great time to buy. Just make sure you are working with a reputable lender, like my favorite, and once you’re in your new home….MANAGE YOUR MONEY, Honey!