Subprime Mortgage Arizona: History and Legislation Effecting the Home Mortgage Market

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Subprime Mortgage Arizona: History and Legislation Effecting the Home Mortgage Market

Subprimelending has been the target of many law makers who believe that it represents a predatory lending practice and is unfairly biased against minorities. Knowing the facts about subprime mortgages can help consumers make an informed choice when shopping for home loans.

A subprime mortgage (also referred to as near-prime, non-prime, and a second chance loan) refers to the practice of lending money to borrowers with a low FICO score. Typically a subprime borrower has a credit score less than 640, butthis has varied throughout history.

The most common type of subprime lending is an adjustable rate mortgage or ARM. An adjustable rate mortgage initially offers a very low interest rate, usually below the prime rate offered by a traditional loan. For an informed investor who intends to fix and flip or only own a home for a short period of time, an adjustable rate mortgage can be a great investment tool. However, an ARM is somewhat misleading to uninformed borrowers as it initially charges a lower interest rate. After the ARM period the rate adjusts to a significantly higher rate and higher monthly payment. These types of mortgages were given out frequently by banks to un-creditworthy buyers in 2005 and 2006. Once the loan reset to the higher interest rate, many borrowers were unable to afford their new monthly payments and defaulted on their home loans. ARM were largely responsible for the increase of subprime mortgage foreclosure increases in the mid-2000s.

Another type of subprime mortgage is a hard money loan. A hard money loan is secured through a mortgage broker but is backed by investors instead of a bank. Depending on the merit of the property you are purchasing as well as potential for income, investors will often invest capital, even if your credit score is lower than what is ideal. However, most hard money loans are short term loans and not designed for the purchase of a home that you will own for more than a few months.
Since the recession and housing market crash and subsequent foreclosure boom between 2007 and 2009, subprime mortgage Arizona has become the target of concerned law makers and citizens. Many legislators view subprime lending as predatory lending practice that unfairly penalizes minorities and the poor. They equate subprime mortgage Arizona lending practices with title loans and payday loans. While it is true that subprime loans generally tend to have higher interest rates, they are the same type of loans of opportunity that payday and title loans are. When used responsibly, subprime loans can be a valuable tool for buyers with bad credit scores.

Subprime Lending: Myths and Facts

The first claim by politicians looking to discredit subprime lending in Arizona is that it would unfairly discriminate against low income borrowers. This claim is categorically false. In fact, most subprime borrowers in Arizona are above the median income line. Most subprime mortgages tend to be second mortgages that are purchased as investment properties. Subprime borrowers also tend to own fewer low value homes than traditional mortgage holders.
 Another criticism is that subprime loans are unfairly given out to borrowers who are young without a substantial credit history. Subprime mortgages are not given out to mostly young borrowers. In fact, the average age of a borrower for a subprime mortgage was between 35 and 55 years of age. This indicates that subprime mortgages are not being used to penalize borrowers with insufficient credit history due to age.
A second claim against subprime mortgage Arizona is that minority borrower will be discriminated against and only offered high interest loans. A demographic study indicates that this is untrue. By analyzing zip codes and demographics, it was concluded that subprime mortgages are not more common in zip codes with a Hispanic population concentration.
In fact, subprime lending can help allow access into the mortgage credit market for borrowers that would otherwise not qualify for a home loan. If you find yourself struggling to qualify for a mortgage, research your options with subprime mortgage Arizona. Find a broker that can guide you through the process of qualifying to purchase your first home.

Level 4 Funding LLC

Dennis Dahlberg, Broker/RI/CEO
NMLS 1058389 AZMB 0923961
23335 N 18th Drive Suite 120
Phoenix AZ 85027

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