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The Subprime Loans Disaster
Many people dream of one day owning their own home – their own quintessential white picket fence. For people that achieve this dream, buying a house will probably be the biggest purchase they make during their lifetime. Although people may save for years to have enough money for a deposit, they may also often seek the financial assistance of a bank or other lending institution. In fact, it is very common these days for houses to be purchased with the assistance of a loan.
With so many loans on the market these days, and so many banks offering different services it is difficult to know which is the correct loan for you. Mortgage brokers specialise in providing clients with a range of mortgage options and can also negotiate with lenders on your behalf. Although a mortgage broker is usually free, they will receive a fee from the lending institution you choose as a type of commission for their service. Consequently, you may find that the mortgage broker only offers a limited number of home loan products, dependent upon how much commission they receive from each lending institution.
How do I Apply for a Loan?
In order to receive a loan you must first have the approval of your lending institution, most likely a bank. Banks however, do not just grant loans to anybody. When applying for a loan you will need to provide documents that prove your savings history, credit rating, and earnings. Sometimes people are refused loans on the basis that they may not have a perfect credit rating or cannot verify consistent earnings because they are self-employed. On the other hand, some people who do not meet these criteria may still receive financial assistance from a private financial institution, rather than from a bank.
What if I Cannot get a Loan from a Bank?
Private financial institutions and businesses that specialise in lending may provide assistance for people who do not meet the strict criteria that bank loans are assessed on. This is beneficial for people who have been refused assistance by a bank, perhaps because they have previously been declared bankrupt, have defaulted on a loan before or have a lower income. However, they must also be aware that often the rates of these institutions will be higher than what the bank offers.
Mortgage brokers are employed by mortgage companies, which may themselves also offer loans. Many mortgage companies make a point of being able to offer loans to those who cannot typically receive bank assistance. Like banks, mortgage companies can offer a wide range of loans, tailoring them to your needs, whether it be at a fixed or variable interest rate, a five-year or twenty-year loan and so on.
Loans offered by these types of companies are often called 'non-conforming' loans because they do not conform to the typical loan limits of banks. A type of non-conforming lending is a subprime loan, which essentially means that the borrower does not qualify within the prime underwriting guidelines usually applied to loans. Subprime loans can be provided for a variety of reasons, such as financing a house, repaying a credit card, or purchasing a new car.
The USA Subprime Loans Disaster
Although subprime loans do offer another avenue of financial assistance they have been heavily criticised following the recent supbrime loans disaster in the United States of America. Since 2006 more than 100 subprime mortgage lenders have collapsed. This consequently triggered the meltdown of the securities market in the USA, which has been a major factor in the ongoing global economic downturn. But what caused so many subprime mortgage companies to collapse in 2006? Many mortgage companies were established during a time when interest rates were very low and lending was very easy. However, a sudden rise in the rate of people defaulting on their mortgages and foreclosures had a severe effect on these mortgage companies.
Due to the current economic crisis, banks will be increasingly wary of how they offer loans and who can be eligible for mortgages. Many financial institutions will certainly be reluctant to provide subprime mortgages. However, as the unemployment rate increases there will also be a growing number of people who require financial assistance but cannot qualify for a traditional bank loan. Although there are many risks associated with subprime loans, there may be no other option for people refused loans on the basis of the strict criteria applied by banks.
