When to choose a subprime mortgage?

Are there legitimate uses of subprime mortgages? Of course there are. However, these loans have higher rates to offset the higher risk of delinquency or default for the investor. The overwhelming majority of subprime mortgages are also adjustable within a two to three-year time period. No one should choose one if he/she can get a prime rate mortgage.

Sometimes people find they just can't qualify for a conforming mortgage, but don’t want to wait. Imagine the computer consultant who has been going from start-up to start up with periods of unemployment, the professional who was bankrupt but is back on her feet, the young professional with monstrous student loans and a good income.

Among subprime mortgages are what are called “no income verification” loans, which do not require pay stubs; these are great for self-employed people, or people who work for tips. The lender may accept the income as whatever the applicant states. There are also “no doc” loans which do not require verification of any income or assets.

When subprime borrowers know what they are doing, these loans have their place. However, given that 70 percent of African-American and Latino borrowers -- compared to 16 percent of white borrowers -- were deemed subprime (see article), a cloud remains over the loan industry. Can they show that determining who qualifies, and who doesn't, for conforming loans has been made fairly and consistently, and was not based on race or ethnicity? The other question hanging over lenders' heads is: Can they show that when a borrower has an adjustable rate mortgage, he/she was informed what the increased payment would be down the road?

If the playing field is level and borrowers are really informed, conforming and subprime mortgages are both legitimate ways into home ownership.