Frequently Asked Questions (FAQs)

What is "sub prime" lending?


Sub prime lending is a financing option for those with less than perfect credit.

Sub prime lending has become very popular in recent years.  Borrower’s who normally would not qualify for traditional loans, are extended credit. Recently, the sub prime market has dramatically changed. In the last 2 years, many homebuyers with low credit scores were able to purchase homes with 100% financing.  Usually, the homebuyer would agree to a higher than normal interest rate in order to obtain the loan. Banks realized they were taking a higher risk, but couldn’t resist the high returns they were promised. When the real estate market started changing, many loans went into default. Now the home owners, who started out with a low introductory interest rate (option arm or neg. Am.) cannot afford to make higher interest payments. In addition to the original amount of the loan, these borrower’s were sometimes adding to the principal due on the loan. These borrowers either default on the loan and face foreclosure, or try to sell their houses. In general, homes are not being appraised for as much as they were when the market had “peaked.” Now the banks are not able to recoup the money they originally lent. Sub prime lenders are beginning to go out of business. Major Banks that purchased some of these loans on the secondary mortgage market are also starting to lose value in declining stock prices. We are expecting to see much stricter requirements for borrowers as a result of this.