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Bad credit home loan borrowers trigger subprime mortgage meltdown

According to a survey, 20% of the mortgage originations in the year 2006 were bad credit home loans or sub prime mortgages. Subprime mortgage market was at its peak during that time. Lenders used to offer subprime mortgages to borrowers with bad credit history. The lenders used to determine the creditworthiness and on its basis, they used to offer high interest rates on these loans.

Subprime mortgage – What it means

Usually, borrowers with bad credit history were unable to take out conventional mortgage loans with favorable terms and conditions. Therefore, they were left with no other option than to take out subprime mortgages. Before the economic recession, these bad credit home loans were typically offered to a person whose credit score was less than 550. Consumers used to get these loans with limited documentation or short employment history.

Reasons behind subprime mortgage delinquencies

As stated early in this article, lenders used to charge high interest rates for offering the subprime mortgages as they wanted more return for taking greater risk. Though borrowers were able to take out bad credit home loans, yet they started experiencing difficulty in repaying them. They could not even afford the monthly payments as a result of which they started defaulting on their mortgages, which led to a number of foreclosures. The property values also declined dramatically and the lenders could not even recover the amount that they invested on the properties. Apart from this, the housing market also slowed down drastically. All these factors led to the subprime mortgage meltdown. Gradually, as the number of foreclosures increased, the lenders stopped offering bad credit home loans.

Several consumers took out bad credit home loans with the intention of refinancing them in future. However, the housing boom came to an end and homeowners were not able to build up as much equity as they had planned previously. Therefore, they failed to satisfy the qualifying factors to refinance their subprime mortgages. This was another important factor that led to the credit crunch, which started in the year 2007 and continued for 2 more years.

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