President’s Column, Texas Association of REALTORS®
Subprime problems not the end for first-time homebuyers
Unless you’ve been vacationing on a remote island sans TV, you’re probably aware of the news regarding the collapse of the subprime mortgage lending market. Even with all the media hype surrounding a mortgage meltdown, it may be difficult to ascertain how this news could affect first-time Texas homebuyers. A subprime loan is not necessarily a negative thing. But before you purchase your home using one, it helps to understand what’s happening in the real estate market to cause such turmoil and what you may be getting into if you opt for a subprime loan.
What’s a subprime mortgage?
Subprime mortgages are typically home loans made to borrowers with poor credit ratings, low income or limited credit histories. It’s likely that these borrower’s have credit scores below 620 and do not qualify for loans from mainstream lenders. Subprime lenders rarely identify themselves as such. The clear giveaway is their prices, which are higher than those quoted by mainstream lenders.
What went wrong?
Subprime mortgages used to make up a very small portion of the mortgage market. But the housing boom emboldened many lenders to make riskier loans. In 2006, subprime mortgages accounted for approximately one-fifth of the total U.S. loan market. Many of these subprime loans were made to borrowers who didn’t have the income to make the monthly payments. However, it took awhile to see that there would be a problem because many subprime mortgages began with low-interest rates that climbed significantly during the first few years.
The problem worsened as property values failed to rise as they had between 2000 and 2005. For many parts of the country, home prices flattened – or even dropped – forcing many subprime borrower’s into delinquency and eventually foreclosure.
When the media refer to the collapse of the subprime mortgage market, they’re pointing out the subprime lenders who – due to an excess of faulty loans – have recently gone out of business or scaled back operations dramatically. This doesn’t mean that subprime loans are gone. It does mean, however, that mortgage lenders are tightening lending rules. In the future, mortgage lenders will impose tougher requirements – looking for better credit scores and possibly more income. This will make it more difficult for many first-time homebuyers to secure a subprime loan.
Here in Texas
Subprime loans account for about 13 percent of mortgages in Texas. Approximately 16 percent of those are delinquent. But this doesn’t mean doom-and-gloom for the Texas housing market – nor does it mean that first-time homebuyers will find it impossible to get into a home.
The real estate industry is cyclical in nature. We have witnessed one of the strongest housing booms in our history and currently, the market is attempting to normalize itself. Texas has a strong job market, healthy economy and moderate home-price appreciation. As a result, it’s unlikely that we’ll experience what has happened in other markets – where prices have fallen leaving borrower’s with subprime loans owing more than the home is worth.
What does this mean for me?
Sit down with your Texas Realtor and discuss what type of loan you may qualify for. Subprime does not equate to predatory lending. But if you qualify for a mainstream loan, you’ll want to avoid subprime mortgage lenders because you’ll be paying more in fees and a higher interest rate. Of course, the safest loan is a 30-year, fixed-rate mortgage. This ensures that your monthly payment will never fluctuate.
If you don’t qualify for a prime mortgage loan, make sure you understand the pros and cons associated with subprime lending. As I mentioned, you’ll pay more out of pocket. But there are other factors to consider as well, particularly as lenders tighten the reigns on risky and exotic loans.
If you are looking to purchase a home and have weak credit history or poor credit, your Texas Realtor can help you to understand and sort through the options available to you. There are a myriad of resources and programs out there for first-time homebuyers and those with special financing needs. Ask your Realtor about programs that may work best for you. For more on homebuying in Texas, I invite you to visit TexasRealEstate.com.
Submitted by Amy DuBose
Association Executive – San Marcos Area Board of REALTORS®