Minnesota Mortgage Blog - MN Mortgage and Real Estate News

Subprime borrowers learn hard lessons

Reading the paper, watching the news, and answering my own office phone clearly tells us that people are discovering their subprime loans are not all rosy, threatening to put them into financial trouble on their white picket fence dream home!

Subprime borrowers are those who typically have to accept higher rate home mortgages loans because of their checkered credit history. Lower credit scores caused by huge credit card debt, past late payments, previous bankruptcies, and other credit challenges.

Is that you? If it is, you probably have an adjustable rate loan that cost you an interest rate 2-3% or more higher than someone with perfect credit. A lender may have said "yes" to your application, but it comes with a lot of risk, higher rates, higher fees, plus terms and conditions you probably now regret.

Regardless if this was a loan to purchase your dream home, or a refinance of an existing loan, it's time to pay the piper. First, understand that you probably took a high risk loan and probably an unreasonable risk. If it was a purchase, you probably know you should have bought a less expensive home, and stayed within budget. If it was a refinance, you probably rolled in out of control credit card debt as a temporary stop gap to those payment problems. Either way, now you are stuck with a loan that has adjusted and the payments just keep going up.

There is a lot of talk about bad lenders putting people into bad loans, and I know that exists. But from what I see everyday, the bulk of the problems lies with a lack of personal responsibility on the consumers part. I talk to people everyday, then dig deep into their history to identify the true root cause of the problem. Everyday I have people knowingly want to buy homes where their debt ratio is well over 50%. How long before that house of cards falls down. Just because a lender says yes, doesn't mean you should do it.

Now what? First, don't bury your head in the sand. The problem is not going away. Investigate selling the home and buying something smaller. Look into refinancing into something fixed (even if the payments are higher - at least it will stop adjusting). Understand that letting the house fall into foreclosure is typically not an acceptable answer and it has ramifications for years to come.

It pains me everyday to hear the stories I hear. With any luck, you can make it work without losing the home or ending up in bankruptcy. It will probably mean a second job, eliminating the nice car, tearing up credit cards, selling the boat, and a lot of other sacrifice. All tough choices. Hopefully you don't end up paying the ultimate price to learn a lesson we all were never taught in school.