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Why Are There Subprime Loans? PDF Print E-mail
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So why do subprime home loans exist anyway? If they are bad, as the media and some on WallStreet want you to believe, why are subprime loans around in the first place.

Subprime loans exist because many banks refuse to talk to or help many hardworking Americans who do not fit in the bank's perfect little box. Why wouldn't a bank want to talk to these Americans? The answer can be any number of things, but ultimately deals with perceived risk a borrower's past.

  • Been divorced?
  • Have high balances on your credit cards?
  • Made late payments in the past?
  • Had a judgment or bankruptcy?
  • Been laid off of your job?
  • Self-employed?
  • Recent college graduate?
  • Had an injury or unpaid medical bills?
  • Had your identity stolen?
  • Made bad choices in the past?
  • Recently become a U.S. citizen?
  • Need to pay off credit card debt?

Many good, hard-working Americans find themselves answering "YES" to one or more of the above questions at some point in their lives. It doesn't necessarily mean they have bad credit, and it certainly doesn't necessarily mean they don't deserve to own a home. Yet any one of the above reasons (and more) could make the bank view someone as a risky borrower, and thus turn them down for a typical conforming (or Prime) loan.

Years ago, people looked at the percentage of Americans who owned homes and the people whom banks were willing to lend to. It became rather obvious that there were other Americans out there, many of them, who wanted to own a home and were capable of doing so, but couldn't get the time of day from their local bank. Thus, subprime lending was born.

Yes, there are some other alternatives to subprime, such as FHA loans and government assistance programs. But even those programs have many restrictions that aren't available to every consumer. They are also very restrictive in who can offer them and how you can get them. Thus, the market for subprime loans was strong.

Because of this void, many lenders sprung up who offered alternative lending guidelines, and brokers sprung up who helped find connect consumers to those lenders. Because of subprime loans, more people were capable of achieving the dream of home-ownership. Because of subprime loan, more people were able to build equity in a home instead of making their landlord rich by paying rent each month. Because of subprime loans, a new breed of homeowners and entrepreneurs were able to take advantage of tax-incentives and property-appreciation which previously only benefited a select few.

Subprime gave people options, leveled the playing field, made the ability to own a home more fair, and removed some of the social and economic barriers that prevented people from attaining their version of the American Dream. Subprime, by its very definition, helped those who otherwise couldn't get help.

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