Frequently Asked Questions About Subprime Mortgages
When should I consider a subprime mortgage?
If you’ve been turned down for a mortgage by your bank or credit union, it might be time for you to consider a subprime mortgage. Borrowers with poor credit, a bankruptcy or consumer proposal in their past, uncertain income or the inability to provide traditional paystubs, or those seeking a mortgage on an unusual property might all struggle to gain approval from more traditional, risk-averse lenders. If this is you, a subprime mortgage can be a way to access mortgage funds.
Who is eligible for a subprime mortgage?
Eligibility for a subprime mortgage is generally less strict than eligibility for a normal mortgage. Standard requirements include: Canadian residency, age of majority in your province, and a home to secure the mortgage against. As the value of the property is the most important factor with subprime mortgages, the home in question must be in a marketable urban area, to ensure resale value. Subprime mortgages tend to have minimal credit score requirements. Income level, proof of employment, size of down payment and existing debt levels are all also potential factors, but these generally affect the interest rates you can qualify for, rather than your eligibility in the subprime realm.
What are the typical terms of a subprime mortgage?
Subprime mortgages generally have higher interest rates than standard mortgages, to help offset the greater risk to the lender. However exact terms vary according to the lender’s products and the borrower’s individual circumstances. The average interest rate on a subprime mortgage tracks 1% to 3% higher than standard mortgages, and lenders usually require at least a 15% down payment. Subprime mortgages also tend to have higher fees than other mortgages, ranging from 2% to 3% of the borrowed amount. The life of the loan is usually fairly short in comparison to standard mortgages.
How are interest rates on a subprime mortgage calculated?
Your credit score, size of your down payment, existing debt, income level and other financial factors all affect what terms you will be able to get on a subprime mortgage, including the interest rate you qualify for. The length of the loan also affects interest rate, as does the choice between a fixed or variable rate. The lower your credit score, the higher your interest rate will be, and the greater your down payment, the lower your rate.
How do I apply for a subprime mortgage?
Applying for a subprime mortgage starts with gathering all of your financial documentation. You will need to be able to show ID, proof of address, information pertaining to the property being mortgaged (valuation, purchase details, etc.), financial statements indicating your assets and liabilities, previous tax returns to show income history, and paystubs or other proof of employment. Once you have gathered all of your information, you must complete an application form and submit to the lender for approval. Depending on the complexity of your situation, they may ask for other documents before making a decision.
Are subprime lenders safe to use?
Subprime lenders have something of a bad reputation, in part thanks to recent crises involving over-leveraged homeowners unable to pay their mortgages. This risk is borrower-centric though, and does not reflect on the safety or reputability of the lenders themselves. While there can be predatory lenders in the subprime market, seeking to exploit borrowers who have few other options with high interest rates and fees, there are also plenty of reputable subprime lenders who provide a valuable service to this segment of the population. Subprime mortgages are not however regulated by the federal government in the same way as standard mortgages, so it is up to the consumer to do their due diligence.
How common are subprime mortgages in Canada?
Although only 3% of Canadians fall into the “extreme risk” credit category of a score under 520, nearly 9% (3.5 million) of Canadians have subprime mortgages. This discrepancy highlights that it is not just poor credit that can lead borrowers to subprime lenders – many with good credit and non-traditional income revenues, or good credit and an unusual property are forced to use a subprime mortgage because of strict traditional mortgage requirements. This makes them a relatively common occurrence.
What are the risks of a subprime mortgage?
A subprime mortgage comes with risks, as does any form of debt. The greatest risk is affordability: as these loans have higher interest rates and fees than other mortgages, the risk to the borrower is greater in times of financial stress. Missing payments can lead to loan default and foreclosure. It is imperative to make sure you can afford any loan, but especially a mortgage, before agreeing to it.
Can I build my credit with a subprime mortgage?
Although subprime mortgages are tailored to those with poor credit, using a subprime mortgage to access a loan and then paying it off can actually help to repair your credit over the long term. Building a history of on-time payments and financial reliability will, over time, improve your credit score, and by using a subprime mortgage to do this, you may actually help yourself qualify for a regular mortgage in the future. This pendulum swings both ways though: if you miss payments on your subprime loan, it will have a negative effect on your credit.