Can You Get One of the New Subprime Mortgages?

Photo (cc) by woodleywonderworks

Wells Fargo hit the news recently with the announcement it had dropped its minimum credit score for FHA-insured mortgages from 640 to 600 (the maximum is 850) — into subprime territory.

Wells isn’t the only lender lowering its requirements. “In recent months, a handful of lenders have said that they’re willing to go as low as 580,” writes The Wall Street Journal.

The change doesn’t apply to refinances, only purchase mortgages, the Journal says. (Find out if you qualify from a bank or mortgage broker.)

Borrowers with FICO scores of 720 and higher still get the best rates, though.

Are subprime mortgages back or not?

These moves inspire talk that subprime mortgages are back. But, are they really? As The Wall Street Journal explains, these “FHA-backed mortgages are fully documented, fixed-rate mortgages — not the crazy loans that fueled the subprime mortgage crisis.”

“Subprime” isn’t a precise term. It’s used to describe some lenders, or certain types of loans. It’s also used to describe borrowers with FICO scores under 620 or 640 or 660, depending on who’s talking.

It also describes certain risky mortgage products sold at the end of the housing boom with features like no down payments, no documentation and super-low teaser interest rates that might double or triple after an introductory period.

“Most of these loans went to subprime borrowers, those with credit scores below 660,” Bloomberg Businessweek says.

Subprime also is used to describe lenders who sold risky mortgages or approved borrowers for mortgages they almost certainly couldn’t afford to keep up.

Like old subprime mortgages? No.

Are those infamous loans really back in play? No — not the risky features, anyway. Those features are banned on “qualified” mortgages, those most widely available. Qualified mortgages have new consumer protections. Lenders who abide by qualified mortgage rules are shielded from consumer lawsuits. (Investopedia explains qualified mortgages.)

The federal rules, called for in the Dodd-Frank Act, went into effect at the beginning of this year. They’re enforced by the Consumer Financial Protection Bureau.

On the other hand, yes. Sort of.

You could make a case, however, that subprime loans are back, based on the increased lending to borrowers with lower scores. Wells Fargo is the country’s biggest mortgage lender, so its move made news.

To avoid the taint associated with the word “subprime,” lenders are calling these loans “another chance mortgages” or “alternative mortgage programs,” says Reuters.

Qualifying for a low-credit-score mortgage

Qualifying for a mortgage with a low credit score requires jumping through a lot of hoops – many more than in the pre-bust days. Not everyone with a low score gets approved.

FHA, which insures mortgages, requires credit scores no lower than 580 and a down payment of at least 3.5 percent. With a credit score below 580 you’ll need to contribute at least 10 percent of the loan amount. (Here are FHA rules.)

FHA’s fees are rising and it requires mortgage insurance, making these mortgages increasingly expensive. Mortgages backed by Fannie Mae and Freddie Mac are cheaper, but they’re harder to get.

More hurdles

FHA’s requirements are just the start of a borrower’s hurdles. Lenders add additional requirements (“overlays”). Most demand higher credit scores than FHA does.

Wells Fargo’s criteria for low-credit borrowers are “strict,” Reuters says. They include “demonstrating their ability to repay the loan and having a documented and reasonable explanation for why their credit scores are subprime.”

In addition, the new federal mortgage rules require tougher scrutiny of mortgage applications. These rules require lenders to look at eight areas before approving a borrower if the lender wants protection from borrower lawsuits.

The eight points:

  • Income and assets.
  • Employment.
  • Child support or alimony obligations.
  • Credit history.
  • Monthly payments on debts.
  • What you can afford to pay monthly on a mortgage.
  • Other mortgage costs, like home and mortgage insurance and property taxes.
  • Your remaining income.

Another option

There’s an even more costly option for low-credit-score borrowers — a smaller non-bank lender. They can sell “non-qualified” mortgages that fall outside the federal qualified mortgage rules. They are likely to charge higher interest rates and require bigger down payments. So far, non-bank subprime mortgages aren’t a big part of the mortgage market.

MSN Real Estate describes one non-bank lender:

Citadel Servicing Corp. in Irvine, Calif., is one of very few lenders lending mortgage money to borrowers with FICO scores as low as 500. It began in April (2013) making fixed-rate and adjustable mortgages of $50,000 to $750,000 using money raised from private investors. These mortgages don’t qualify for government backing, which makes them considerably more expensive.

Citadel CEO Dan Perl calls himself a “nonprime” lender. The term “subprime” denigrates borrowers, he says. “We’re talking human beings who have had some bumps in the road.”

Citadel may charge interest rates over 10 percent, Reuters says. Prime borrowers, for comparison, pay an average of 4.34 percent right now on a 30-year fixed-rate mortgage.

Learn about qualifying for a mortgage or improving your credit score from one of the local HUD-approved agencies that offer credit counseling and first-time homebuyer counseling for free or at low rates.

Have you gotten a mortgage recently despite a low credit score? Post a comment about your experience below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
Don’t Pay for These 10 Things: They Are Free With a Library Card
Don’t Pay for These 10 Things: They Are Free With a Library Card

Before you spend another dollar on items and services like these, check with your public library.

7 Reasons Workers Age 65 and Older Have Not Retired Yet
7 Reasons Workers Age 65 and Older Have Not Retired Yet

For some, the golden years are a time to increase the gold — but their reasons for delaying retirement vary widely.

5 Ways to Save up $500,000 in 15 Years
5 Ways to Save up $500,000 in 15 Years

Even if you’re behind in preparing for retirement, there’s still a way to pull together a solid nest egg if you focus.

10 Mistakes That Cost You Money at Warehouse Stores
10 Mistakes That Cost You Money at Warehouse Stores

Wholesale clubs might have great deals, but these mistakes will cost you.

7 Ways Coupons Waste Your Money and Time
7 Ways Coupons Waste Your Money and Time

Here’s why I hung up my scissors and quit clipping coupons.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

Prices Are Soaring on These 7 Items
Prices Are Soaring on These 7 Items

Some surprise price jumps are making life more difficult for consumers.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

This iconic dinnerware is prized for everyday use as well as reselling for profit.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

Beware This Hidden Ingredient in Rotisserie Chicken
Beware This Hidden Ingredient in Rotisserie Chicken

Something foul may lurk in those delicious, ready-to-eat birds.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

7 Home Improvements That Cost a Lot More in 2021
7 Home Improvements That Cost a Lot More in 2021

These projects will take a bigger bite out of your budget than in the recent past.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

5 States With the Worst Health Care for Retirees
5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

7 Big Purchases You Should Never Make
7 Big Purchases You Should Never Make

Sometimes a big-ticket purchase is nothing more than a big waste of money.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.