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Subprime Mortgages - How Do They Work

Prudence Wong

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Presently, there is a lot of hullabaloo in the US real estate industry. There has been a lot of boom and bust in the United States over the past in the real estate area. The boom in the housing market was catered by a number of factors, one being a wise lending program.

The employment of this lending program helped people get home loans for purchasing homes despite having poor credit ratings. This has also been instrumental in creating the recent turmoil in the real estate of the United States. This method of lending loans to people having a weak credit history, is termed as subprime lending.

Generally, people with a credit score less than 620 on a scale of approximately 300 to 900 are known as subprime borrowers. The rates for subprime mortgages can vary greatly. This type of loan is based on a number of risky factors that takes into account a number of delinquencies, type of delinquencies, credit score and the size of down payment.

It was in the mid of 90s that the subprime mortgage lending started to go up sharply. It made for about 20 percent of the home loans in the year 2006. Though subprime mortgage lending practice helps the people to get an entry into the real estate market, but those who take this type of loan carry the possibility of becoming defaulters.

One of the damaging aspects of the subprime market is the increase in accusations that the money lenders target minorities. This is termed as predatory lending. This type of lenders feed upon the lack of experienced borrowers in several ways. They can either overvalue a property, or exaggerate the income or lie about the credit score.

This they do in order to fix a high rate of interest. They even boost for frequent refinancing so that they get a better interest rate which will later help them in rolling high closing costs. You need to be very careful about subprime mortgage lenders, otherwise you can be the next one in the pipeline.

A large number of families in the United States took subprime mortgages to purchase homes fast. Now, they are finding it very difficult to pay off their money. The situation is really tough for them and some have even left their homes vacant and moved up. Foreclosures have hit the states and cities of United States very hard.

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