Are Sub-Prime Mortgage Problems Finally On Their Way Out?

In the summer of 2005, sub-prime mortgage lending was at its peak. Rates were relatively low and lending guidelines were relatively loose.

At the time, the "standard" sub-prime mortgage product was the 3/27 ARM.

The 3/27 had a few basic traits:

A fixed, 3-year "starter rate"

Every six months thereafter, the mortgage rate changed

The formula by which it changed was (4.999 percent + the 6-month LIBOR rate)

If the loan was interest only, it usually converted to principal + interest at the first adjustment, too.

Because the summer of 2005 was the peak of sub-prime lending, it makes sense that the summer of 2008 is the peak of sub-prime adjusting.

For homeowners with adjusting sub-prime loans, there is some (relative) good news out there.

Today, the 6-month LIBOR hovers near 3.15 percent, meaning that an adjusted mortgage rate will be in the neighborhood of 8.15 percent.

This is versus the rate of 10.30 percent that sub-prime borrowers faced last summer when LIBOR was much higher than it is today.

Adjustments of any size can strain a household budget, though, so if you're a sub-prime borrower and your pending adjustment will cause financial strife, be proactive -- talk to me before you miss a payment.


Lenders are often more willing to talk with "current" borrowers than with delinquent ones.
(Image courtesy: Washington Post)

The "New" King!

The market is changing and because it is changing a new product is beginning to be huge; FHA Loans.

The reason is because subprime loans have all but gone away and now 100% loans are leaving us too. All this is beginning to make FHA loans the best option for many people.

FHA is a government backed loan that exists to help get people into homes. The government believes in homeownership and for this reason they have FHA loans.

FHA loans typically have very good rates and are possible to get into with no money down.

With FHA loans a lender has to have a "brick and mortar" business within 200 ft. of the home that is being loaned on, but not with Envision! We have applied for a national license and have received it! What does this mean? Well in the current 46 states I can do loans in I can also do FHA loans! This is a very important loan and probably will be the future for the next 3-5 years.

Some important points to note about FHA loans is:

• 1.5% fee up front just to use FHA (can be wrapped into the loan)
• 3 % down payement required (this can be gifted from the seller)
• Not a FICO (credit score) driven product
• Must have clean mortgage history for most recent 12 months.
• Must put down at least $500 out of pocket.
• No reserves (i.e. 2 months worth of income) required
• Can only have 1 owner occupied FHA loan and 1 Investment FHA loan at once.
• Similair rates to if you were putting 20% down on a home.

If any of this is confusing call me up today and we can talk about your situation and what you are looking at doing.