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Evaluating a Subprime Lender

Subprime mortgage lenders, which are lenders who provide loans to people with poor credit, vary tremendously in their requirements, fees, and contract terms. Don’t get stuck with a bad contract designed to make you default, read the contract and ask questions first before you sign. Once you have researched the field of subprime lenders and have chosen a few with whom to do business, you’ll then want to get additional details about the contract being offered.

First of all, the interest rate is of great importance. Expect the interest rate to be higher than that offered by conventional lenders. Get the specific number, don’t be fooled by the claim that “your interest rate will be based on the prime rate.” That is meaningless, since they’re not telling you how it will be based on prime rate. It could mean prime rate plus two percent, or it could mean prime rate plus 20 percent.

Also, you will probably be required to pay “points,” which is an additional advance fee based on the loan amount. Find out the precise number of “points” they require you to pay, and whether payment thereof will result in a lower interest rate. In addition to points, find out what all other closing costs will be. Any lender that is not willing to at least give you an estimate of closing costs is not reputable.

Since you’re borrowing from a subprime lender, you expect to pay more in interest and fees. But while you are paying off your high interest rate mortgage, you are accruing equity and a good payment history, and in a few years you may be able to get a lower interest mortgage. Find out if there is a penalty for prepayment.

And, finally, read your contract in detail, and make sure you understand every word. It may be worthwhile to pay an attorney to also look it over and highlight any potential problems. Though you should probably not expect subprime lenders to be very flexible in terms of changing the contract, at least know what you’re getting into ahead of time.