Sub-Prime Mortgage Loan - How Sub-Prime Loans Differ From Conventional Loans

Posted by Nick Niesen on October 29th, 2010

Sub-prime mortgage loans offer more flexibility than their conventional mortgage loan cousins. With terms determined by Freddie Mac and Fannie Mae, conventional loans have strict guidelines on loan amounts, terms, and PMI requirements. With sub-prime mortgages, lenders can provide more choices with an increase in rates.

The Limits Of A Conventional Loan

Conventional loans are often sought for their low rates. But those low rates come with limitations. Freddie Mac and Fannie Mae buy mortgages after they have been processed by a financial company. This frees up money for the lender to make more loans. However, Freddie Mac and Fannie Mae have tight guidelines on what types of loans they will purchase.

Among these limitations are caps on loan amounts. In 2006 the limits were set at $417,000 for a single family house. Every year these caps are reevaluated. Conventional home loans also require you to carry private mortgage insurance if you borrow more than 80% of the home?s value.

To qualify for a conventional mortgage, you must have good credit, cash assets, and steady employment history.

The Options Of A Sub-Prime Loan

Sub-prime home loans provides financing for those with poor credit or unusual application terms. This can include jumbo loans, exceeding the limits of a conventional loan. People with unusual or unpredictable jobs may also find an easier time getting financing with a sub-prime lender.

Sub-prime mortgage terms are determined by the individual lender. So you can get a zero down loan with a poor credit score. You can also find near market rates by placing a large down payment at closing. Private mortgage insurance is not required with a sub-prime mortgage, potentially saving you hundreds a year in premium costs.

Getting The Right Mortgage For You

Most financing companies handle both types of loans, so you can easily get quotes for both types. To find the right mortgage, you have to take the time to crutch the numbers.

Look at the APR to determine the total cost of the loan. But also factor in any plans to move or refinance in the future. By turning over your home loan in a few years, you don?t want to pay out large application fees for low rates that don?t have time to save you money