How Do You Know If You're Sub Prime?

Posted on: 02 January 2008 by Gareth Hargreaves

The news is full of the woes of the "sub prime" market in the USA, the worst being the "run on" and apparent near-collapse of mortgage lender Northern Rock.

But what actually does "sub prime" mean? And do you come into that category? David Titmuss of The Mortgage Lender, says, "Eighteen months ago, perhaps only 15% of mortgage applicants were classified as sub prime - but we estimate that around 40% of all applicants today can be classified as sub or near prime."

Sub prime is only one of many names, most of them euphemisms, for a mortgage or loan where the borrower is unable to obtain a mortgage via the more usual channels, because of a poor credit history, hard-to-document income or assets, or any other reason that would prevent them from obtaining funding through conventional lenders.

Other names for sub prime include "adverse", (with degrees such as "light adverse" and "heavy adverse") "non-conforming", "near prime" (one of the more favourable degrees of sub prime) or "second chance" lending.

It most usually refers to someone with a poor credit record. The person may have been bankrupt, have CCJs (County Court Judgments) against them, or need a loan to consolidate other debts that they have difficulty managing.

In the USA, would-be borrowers usually know if they come into the sub prime category. They are as acquainted with their credit status as with the contents of their bank account - US law requires that they receive their credit reports at least every 12 months - and will probably even know their "FICO score", a credit-scoring method widely used for mortgage lending in the USA.

In the UK people largely have to guess what sort of loan they will be offered, after filling in a form detailing their income, credit history and if they have CCJs or have been refused credit elsewhere.

A borrower is not actually sub prime; it is the mortgage product that is sub-prime. A borrower can, however, be "vulnerable". Anyone with a large amount of unsecured debt may be categorised as "vulnerable".

Are you sub prime?
"If you answer yes to any one of the following statements you are a 'special' or sub prime customer," says David Titmuss.

  • You are currently having problems paying your bills on time.
  • You have missed payments on ANY credit agreements in the past three years.
  • You signed an agreement in partnership with someone else who has missed payments - common with divorced and separated people.
  • You forgot payments on a small credit agreement such as a mobile phone.
  • You have defaulted on a repayment for anything, ever.
  • You consistently run an overdraft which incurs bank charges.
  • You want to borrow more than you would normally be allowed, given your income or circumstances.
  • You have County Court Judgments against you (CCJs).
  • You have been made bankrupt or are in an Individual Voluntary Arrangement (IVA).
  • You are in a debt-management programme.

"Before Northern Rock and the so-called credit crunch, people could find a mortgage even if they were severe defaulters. Those days are over, and many people will be shocked when they apply for a loan or mortgage and are either given a higher-than-expected interest rate, or even declined. And these can be people who are apparently safe and sound, Mr and Mrs Average, living a very Middle England life in a semi in nondescript suburbia," says David Titmuss

So, what can you do if you think you may now fall into the sub prime category? First, check your credit report! Many borrowers who assume that they are sub prime find that they can be placed on mainstream mortgages if their case has sufficient other merits. It is for this reason that it is important to use a good independent mortgage broker or adviser who does not just specialise in sub prime mortgages: its often worth trying with some of the more lenient mainstream lenders first.

"It is time to get on the phone to someone and really discuss the best solution," says Titmuss. "Mainstream lenders put mortgage and loan applicants under intense scrutiny, and are turning away more and more prospective customers primarily because their systems are set either by computer or hyper-sensitive management. With most lenders nowadays its a case of 'computer says no', so the trick is, don't talk to the computer."

The outlook over the next six to nine months is not good for the bottom end of the sub-prime market. Many lenders have withdrawn 'heavy adverse' ranges for high loans-to-value across the board. Many will now lend no more than 75%, so, if you have the sort of mortgage that reflects previous credit problems, it is vital that, this year, your priority is to pay off as much mortgage as you can.

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