Every consumer that is in the market for a home loan whether for a refinance or purchase has been directed to two types of lenders classified as 'conventional' or 'sub-prime.' They are also known as conforming and non-conforming lenders. However the majority of consumers do not know exactly what the differences between the two are. Well the simple answer to that question is, conventional lending is for good credit and sub-prime lending is for bad credit. However that is just the beginning.
Sub-prime (non-conforming) lenders specialize in the following areas:
Lower credit scores and imperfect mortgage history. The biggest draw for sub-prime lending are borrowers with low FICOs and late payments on their current mortgage. Industry rule of thumb has below 600 or 620 FICO as sub-prime candidates.
High loan to value scenarios. When you need to borrow more than 80% of the value of your home up to 100%, sub-prime can do it without private mortgage insurance (PMI) and in some cases only 1 loan. Sub-prime is also a great place for no down payment or 100% loans, typically done as 80/20 piggyback loans.
Adjustable rate mortgages, the common products for sub-prime lenders are 2 and 3 year ARMs. These products carry fixed rates for 2 or 3 years and then adjust according to the terms stated at closing. These are commonly referred to as 'band-aid' loans. The borrower usually has a low FICO and these loans are designed to provide temporary relief to consolidate debt with the future hope of that FICO improving enough so that when the rate becomes adjustable the borrower can qualify for a conventional loan.
Sub-prime lenders typically have their own guidelines and are therefore less restrictive when underwriting a loan. Also guidelines differ from lender to lender.
Sub-prime lending also does a great deal of different documentation loans starting with Low Doc Loans to Stated Income to No Documentation Loans.
Conventional lending (conforming) will suit you better in these areas:
Lower fixed rates, conventional offers the best rates for any fixed rate term.
Loan to value has to be 80% or lower, when you go higher you will be required to obtain PMI coverage.
Conventional provides quick and easy approval. They have automated underwriting adhering to fannie mae guidelines. So as long as you can prove what you input into the application system (i.e. income levels, assets, and home value) they will accept and close.
Full Documentation loans are typically the only ones offered. They will want to see recent pay-stubs and past 2 years of W-2s or past 2 years of federal tax returns.
Now that you have an idea of the areas of expertise you need to determine which path is best for you. To do this we recommend enlisting the assistance of one of our trusted lenders. They can gather your information and qualify you into the best program for your situation, conventional or sub-prime.
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Every consumer that is in the market for a home loan whether for a refinance or purchase has been directed to two types of lenders classified as 'conventional' or 'sub-prime.' They are also known as conforming and non-conforming lenders. However the majority of consumers do not know exactly what the differences between the two are. Well the simple answer to that question is, conventional lending is for good credit and sub-prime lending is for bad credit. However that is just the beginning.
Sub-prime (non-conforming) lenders specialize in the following areas:
Conventional lending (conforming) will suit you better in these areas:
Now that you have an idea of the areas of expertise you need to determine which path is best for you. To do this we recommend enlisting the assistance of one of our trusted lenders. They can gather your information and qualify you into the best program for your situation, conventional or sub-prime.