Subprime Loan or Nothing? Pick Nothing!

A subprime loan is a loan given to people with low credit scores. Those loans are either:

1) At a much higher interest rate, or
2) With closing costs and/or points through the roof.

  1. Either way it is highway robbery!

I’ve debated before about the close call of buying vs renting and even steered many people toward renting by dispelling the myths of “making your landlord rich” and the “tax savings” etc. See Don’t Buy Ask Why blog.

In today’s market, even after the declining prices, renting is still cheaper, even after all the tax “breaks.”

(and those of you who want to use technicalities and say “what if I put 50% down,” you can go to the back of the room. Rent Vs Buy numbers should be done as if you were doing 100% financing, or else they aren’t accurate.)

So, if the rent vs buy (see RvB NYT Article I was in) equation is a close call for somebody with a good credit score, let’s look at the equation with somebody with a POOR credit score putting NO money down and paying up the wazoo in high rates or closing costs.

Let’s first back up and talk about how loan officers make their money.
They either make their money
1) Up front with “points” or
2) On the back end with a higher rate.
3) A combo of the above.

(Sidenote: With subprime there is more tom foolery, up front points and padded profits since the lender is trapped and feels they have fewer options. Also the lender charges more for the added hassle factor.)

They make the same money either way, so which route they show you is called MARKETING!

So with Subprime, lenders love to pile on the points (closing costs) and say “the seller is paying for it.”


$300,000 with $15,000 “seller subsidy”
$285,000 with $0.00 subsidy

Which do you think the seller will prefer?
They are the SAME. So lets stop pretending that closing costs are free found money. It is your money.

So the subprime lender wants to mask the TRUE rate of your loan, which is something like 1 0% and they “buy it down” to a more sexy 6% loan (sometimes for only 2 years, then it adjusts higher or they scam you into another refi). Why? Because you “can’t afford 10% a month” And their solution is for you to take the $15,000 (that you also can’t afford) and fudge the numbers to LOOK like you can afford it!
That is like moving money from one pocket to another pocket.

And then they change hats in a couple of years and give you a “no points” or “no cost” refinance. As per the #2 “how a lender makes money” above, they make it with a higher interest rate. Because there is no seller to “pay closing costs” they use marketing again and they build the fee back into the loan with a higher interest rate. Regardless they are making money off you yet again!

Back to your subprime loan on your current purchase. Another way to look at it is if you opted for a no points 10% loan, you kept that $15,000 in the bank and you used $500 per month to subsidize (apply toward your ultra high loan) your monthly loan. That $15,000 would last you 30 months!

So when running the numbers, to get a TRUE idea what your REAL costs are, you need to ask:
“What is your rate with NO POINTS.”

The numbers will suck, but that is reality (or is it realty?).

Recently I ran the numbers and found that for a subprime loan, after all expenses, condo fees, taxes etc were included, the total monthly amount was:

Subprime loan for a 1bdr total = $2,500 a month

I asked the person what it would cost to rent that same place.

Answer: Rental amount= $1200

Renting will save this person $1,300 x 12 or $15,600 EACH Year!

That is over $45,000 TAX FREE in 3 years if they rented!

Sidenote: You have heard about being able to write your interest off on your taxes right? Keep in mind that this tax break is for the rich! Yes, if you are not rich, you get substantially LESS tax breaks. If you are in the 15-20% tax bracket, you get to “write off” your interest, but you get HALF the credit that somebody in the 30-40% tax bracket gets. And if your loan is large enough, it can LOWER you into an even lower bracket. Sounds good, but this is BAD since it lowers the amount you get to write off.

So what are the possible reasons one might come up with to justifying hurrying into a place now with a poor credit score?

1) Some might say “But rates may going up.”
To that you have to look at your loan. Many subprime loans are ARMS and they adjust after a couple of years. If rates go up, and you have an ARM, you will just REFI into the higher new rates. If your subprime loan fixes your rate for 30 years, you will have to do the math. (avoid loans with teaser rates that start lower for 2 years, if you can’t afford it now, you can’t afford it later when it goes up)! I bet if you take that $45,000 in savings over three years, and you fix your credit and buy a place in 3 years, even if rates go up, you will still be much better off.

2) “What if home prices are going up and I need to get a house fast!”
More reason NOT to buy. If the market is going up, all is dandy, but you have to run the numbers if the market goes down! You will be stuck in your house for years until the market rebounds. And no, you can’t just rent it, since rent won’t cover the mortgage.

Sidenote: Watch out, subprime loans also oftentimes have large prepayment penalties. You can’t just refi or sell without paying the bank ANOHTER $5,000 to $20,000! So you are locked in!

Do not get a loan that automatically goes up later. Those are called Teaser rates. Teaser rate
s will HURT when they go up 20-100%.
If you can’t afford it now, you won’t be able to afford it later!

Fix your credit scores first, and THEN consider buying. Here is where you can get started to fix your credit scores.

Bottom line is the American Dream is NOT for people with low credit scores.

Sorry, I know the white picket fence, or small condo gives you that warm and fuzzy, but so does heartburn.

It just doesn’t make any financial sense.

And the blog doesn’t end here. I promise there will be heated debate under the “comments” section. Please add your comments. You might learn MORE from the comment than from this blog.

– Written by Frank Borges LL0SA- Broker/Owner
703-827-4OO6 Please report all typos, I don’t like looking stupid. If you like this post, sign up for new blogs daily, use the form on the right of the page.

This blog was inspired by this 8 minute phone call, watch the video.

  • 7
  • June
  • 2007

22 Responses to “Subprime Loan or Nothing? Pick Nothing!”

  1. Irene Potter says:

    Lots of food for thought here. Hope we see some lenders weigh in on your opinions. I think it’s also important for those subprime borrowers to really work on cleaning up their credit so if they’ve already bought they can dig themselves out from under.

  2. Luci Edwards says:

    Hey Frank,
    I agree with you on the american dream, but I don’t agree the american dream is ONLY for those who have a very good credit or deserve it.
    Everyone have the rights to dream and fix their mistakes in life.
    About the blog, I am not the author and I am just updating the news. If is good or not that is not my decision…about deserving or not, this is GOD business not ours, people know what is better for them.
    Thanks and have a wonderful day!

  3. FRANK LL0SA Broker says:

    Problem is, buyers oftentimes do NOT know what is better for them, because they get tricked into crazy loans by subprime lenders, or they don’t fully understand what is going on. That is why so many are going into bankruptcy!

    They can have the American Dream, AFTER they fix their credit. Paying $3,000 for a place you can rent for $1200 is insane.

  4. FRANK LL0SA Broker says:

    We get the right to decide for them, when time after time we get people that come to us and say “HELP, I’m SCREWED” and their previous lender didn’t quite explain the pitfalls of subprime loans. One guy is looking to sell his house. But then I had to tell him he had a $15,000 prepayment penalty.

    As for low closing costs, that is what I said in my blog. You either have low closing costs and a high rate, or you have high closing costs and a low rate. If you have both, a low rate and no closing cost then you aren’t subprime.

  5. Missy Caulk, Ann Arbor Real Estate says:

    People do trust their lenders and sometimes come hell or high water they are going to GET THAT HOUSE.

    Most end up in foreclosures ( at least in Michigan )

  6. Renee Burrows - NV Real Estate says:

    Some really great advice as usual Frank ~ about waiting until credit is good and saving for a down! That will get you the best rates and deals!

    We are watching the rental market prices blow up here so I don’t know how “affordable” it is to rent after the tax breaks tho. There used to be a big disparity but the gap is really closing up to the point where it is almost cheaper to buy in this buyer’s market depending on what macro market you are renting in and you can buy in!

  7. FRANK LL0SA Broker says:

    Thanks Renee and Missy,

    All I’m saying is run the numbers. If in Vegas the numbers work, great. But I bet the numbers don’t work if you have a 10% interest rate!

  8. Edwin Reich says:

    Great post!

    Renee- Super news, prices must have come off by 50-60% in NV if you are correct. Maybe its time to look again.

  9. FRANK LL0SA Broker says:

    Another question: At what point does a Realtor have an obligation to not allow financial suicide? If we see somebody “buying at all costs” and they have horrible credit, and we don’t see it possible for them to be able to pay their mortgage, do we stop them? Do we send them elsewhere?

    A bartender has to cut off a drunk who has had too much to drink, does a Realtor have to cut off somebody about to do harm to themselves? Or is it a case of “who are you to stop somebody from the American Dream.”

    Personally I couldn’t help somebody buy a place in such extreme situations, if they didn’t give me a good enough of an explanation.

  10. million says:

    great post, Frank. and this had me laughing…

    “Sorry, I know the white picket fence, or small condo gives you that warm and fuzzy, but so does heartburn.”

    as to your question from the comments section wrt assisting someone reach for a suicide loan: brokers and lenders don’t bother w/ fiduciary duty, so why should realtors? just knock off the “it’s a good investment” spiel and we’ll call it a wash.

  11. Kurt Jackson, CMPS says:


    Great post. Over the last 6 years I spent time trying to talk people into slowing down fixing their credit and let’s get you into a much better more stable loan. NONE of them listened to me, they went to other lenders that gave them the 2yr Time Bomb and many of them lost their home to foreclosure.

    I have a hard time feeling sorry for someone that doesn’t heed the advice of someone that just gave up their commission to try to properly advise them.

    As far as where the real estate agent is in this deal- it’s just like the mortgage business there are only a handful of good quality folks that will try to properly guide their client the rest are in it for the pay check.

  12. Angela Harrington Loan Officer Michigan says:

    Yes Missy your right I have had some buyers give me the I will do ANYTHING to get that house. Ususally it’s a 6+ month waiting period to clean up that awful credit. But they want it now 10%, whatever, they say. I can’t even find banks that will loan in Michigan anymore due to the high forclosures.

    However it still is cheaper to buy than rent here in Mid-Michigan.

    Interesting Post Frank.

    Angela Harrington Loan Officer Michigan

  13. million says:

    hey Frank,

    another foreclosure at Clarendon 1021 blah blah etc etc… okay, seriously, that’s 4 now.

    from the WaPo legal notices today:

    “…for sale at public auction at the entrance to the Circuit Court Building, Justice Center, 1425 Courthouse Road, Arlington, Virginia, on June 29, 2007 at 2:00 o’clock pm the property described in said deed, located at the above address and briefly described as: Unit #324, Claredon 1021, a Condominium, including garage space/parking space B3-32…”

  14. Knows the meaning of NPV says:

    We are moving to DC area, and are looking to rent instead of buy because the numbers are just crazy right now — we could buy for $4500 a month, or rent it for $2500 a month. But a “realtor” that somebody referred my husband to referred him to her favorite lender. Who responded with some options for how to buy houses we can’t afford. Guess what? They involve an ARM, a second mortgage, all kinds of tricks. Guess what the header was on the e-mail that this guy sent this proposal under? “Traditional fixed rate mortgage.”

    My husband is, bless him, not the slightest bit saavy. I called him back and told him under no circumstances should he talk to either of these people again. We’re not subprime – my score is fantastic. But the realtor and the lender were trying to put my husband into more house than he could possibly afford. One, I might add, that we could rent for half of the cost.

    There are some mighty unscrupulous people out there. Keep your eye on your wallet, and make CERTAIN that you read and understand everything that you sign at your closing, regardless of what you have been told. If the numbers on the papers don’t match what you were told, or what you saw when you reviewed the documents before the closing, WALK. In my limited experience, they push you to just sign those documents rather than reading them. Review it all. Make them wait. If you could get the credit cheaper on a credit card, why the heck would you EVER sign up for that much debt at those kinds of rates???

  15. million says:

    knows the meaning of NPV-

    who’s the DC-region realtor? we have to start naming names and calling these dirtbags onto the carpet. this guy was trying to get a hefty commission and stick you w/ a toxic mortgage, he deserves to be lambasted publicly.

  16. FRANK LL0SA Broker says:

    Hello Knows the meaning of NPV
    Yep, I have said many times that renting sometimes is significantly cheaper. I’m glad you ran the numbers and figured out what worked for YOU, and not for the Realtor. Most Realtors don’t even do rentals, so don’t think they are unbiased since they make money either way. Yeah right.

    As for Arms and an 2nd trust, they aren’t always a bad thing. But that is weird that they called it a traditional fixed loan. Can you email that to me?



  17. FRANK LL0SA Broker says:

    Million I’m currently working with the FBI to bring a lender that offered to bribe an appraiser to justice.

    As for the foreclosures, none of them have gone to foreclosure. They get settled before reaching the courthouse. But still 4 notices is horrible.

  18. million says:

    keep up the good work, Frank.

    have you seen this vid yet?

    one could argue that an auction is not FMV, but i wouldn’t.

  19. Knows the meaning of NPV says:

    I may forward the email to you, Frank. Still trying to decide whether I should. I should also say that it is (I hope) the exception rather than the rule that people are unscrupulous — I did not mean to imply that most people (or most brokers) are. But I have seen some shady things done to people who were subprime involving what we lawyers like to call “contemporaneous oral agreements,” and it seemed extraordinarily shady to me that this person put a non-traditional loan package under the heading “traditional fixed rate mortgage.” My husband read the header, and didn’t even notice what terms were clearly spelled out in the attached e-mail. He skipped right over the mumbo jumbo and to the bottom line, thinking it was a “traditional fixed rate” proposal. The man has a college degree.

    Buyer beware is critical. And as for the name of the realtor, I won’t call her out either. Salespeople are going to try and sell you on something: it is the consumer’s job to take what they say and evaluate it (especially on something of this size). For all I know, my husband said “this is what we need, how do we get it.” As I mentioned, not saavy. But it makes me sad to think how many people don’t ask questions in their interactions with people, who are interested parties or salespeople, in the misguided belief that their interests have been taken into account, or that the relationship is more fiduciary than it is.

  20. Sam says:

    Hello Frank,

    So you think people with bad credit scores are not entitled to the “American Dream”? I refer to it as the American Nightmare. Do you have any idea how difficult it is to fix credit? (I imagine you do given your profession). Back in 2004 I discovered that my credit was screwed when I first tried to buy a property in Austin, TX. Was it something I did? No. Was I the victim of identity theft? No. I was the victim of a Credit Agency (Experian) who was reporting about 50 revolving trades in my name and one installment account (mortgage $130K). It was not until May 2006 that those items were removed at my persistent request. I still have one item that is an alledged debt that is a zombie debt (over 7 yrs old) item that an unscrupulous collection agency (Asset Acceptance LLC) has re-aged and Experian refuses to remove it even after I’ve informed them of this fact (it em is now scheduled to come off my credit report Jan 2011). On a side note: the FTC and FCRA are paper tigers. So, should I be denied a home or “the American Dream” because of another entity’s actions? Should I rent forever? Well regardless if I should the reality is that I was denied and continue to rent. I could have purchased a home with an 80/20 at 7.9% on the first lien with a second lien for 14.5% with no pre-payment penalty for either. That sucks. I absolutely refuse to pay double digit interest rates on any loan, so I’m excluded from the homeowners club. Also in my humble opinion 100% financing is horrible. My experience educated me and I’m continuing to learn more. I do not disagree that a person who can not manage their finances should not be purchasing a property. I disagree with the current credit scoring system as it is designed to cost people money, does not reward improvement, and offers limited means of relief to effectively and permanently repair a credit score/report. Like to hear your thoughts.

  21. Moonkin says:

    Dear Sam….don’t pretend that you know what you’re talking about you do-do head.

  22. BenHobbs says:

    Dear Sam,

    I understand what you have gone through. I am currently trying to repair my credit as well. Do you have any tips or recommendations as to how I can clear this crap up? What is your advice? Any help would be appreciated. Thank you in advance.


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