Author: Felecia Roberts

Carrington Mortgage Services has launched a new line of subprime mortgages targeting the 100 million U.S. consumers with less than perfect credit. While Carrington already offers subprime loans via government channels, such as the FHA and VA, these new additions are not backed by Fannie Mae or Freddie Mac. They appear, instead, to be proprietary loan solutions offered by Carrington itself.

Here’s what the mortgage looks like: Borrowers can have FICO scores as low as 500 and loan amounts as high as $1.5 million. Recent credit events are okay, and bank statements are acceptable to verify income. Cash-out refinancing can be as high as $500,000. Carrington is advertising these loans as the ideal solution for those who have low credit scores, high debt-to-income ratios, a recent credit event, or who are self-employed.

 

What Carrington Mortgage is Saying

The company has said that these loans are “non-agency,” meaning they do not comply with the underwriting guidelines of Fannie May or Freddie Mac. Additionally, Carrington is offering jumbo loan amounts, which exceed the current conforming loan limit of $453,100. This is meant as a way to increase borrower flexibility over standard loan options. So, why should we care? Subprime mortgages were a major catalyst in the American financial crisis in the mid-2000s. Just a decade after the biggest financial crisis in U.S. history, the company has begun to offer these predatory loans. However, this isn’t the whole story.

 

History Review and Personalized Advice

One might argue that underwriting issues weren’t the only factor to lead to the housing crisis. Rather, the risk was layered. A multitude of factors, such as a low credit score, high debt-to-income ratio, no or low down payment, and limited documentation, combined to create a high-risk home loan. Conversely, a borrower with a very low credit score but a large amount of assets and down payment, along with a stable income, could be a suitable candidate for this new subprime loan. Low credit scores are incredibly common, and it could be that Carrington is attempting to offer a solution to those wrecked by the financial crisis and attempting to rebuild.

That said, if you have a low credit score and are in search of a mortgage, do your research. Don’t side with Carrington just because they will accept your low credit score; shop around and see what else you can find.

The majority of people have some experience in the “gig economy,” but many have made it their livelihood. If you make all or most of your income through rideshare, freelance, or app-based services, you’re likely wondering if this type of income can be used to obtain a home. While it may be more difficult than it would be with a salaried position, obtaining a mortgage with a gig economy job is not impossible.

 

Most mortgage lenders will verify your income to determine how much mortgage you can afford, but if it can’t be documented (or if it is documented in an unusual way), you might run into trouble. However, large mortgage financiers like Fannie Mae and Freddie Mac are already discussing options and beginning to take action for gig economy-reliant individuals. This means it should be easier for you to get a mortgage, even if the process is not yet completely clear. To that end, the cooling mortgage market may result in a more expeditious effort to get more customers in the door, meaning this process is likely to speed up.

 

Freddie Mac recently predicted that 43% of U.S. workers will be freelancers by 2020—up from just 6% in 1989. These positions are, essentially, jobs that allow the individual to put in the hours and time they can. The workforce behind companies like Uber, Lyft, and Postmates choose the hours they work to perform deliveries and driving-oriented tasks, while those who use Airbnb or Turo rent out their homes and belongings to others to turn a profit.

 

While many Americans have experience in this economy, most use it to supplement their existing income. Some also use it to meet a specific goal, such as saving for a down payment on a home or to qualify for a mortgage. While this provides an essential income boost for most, it introduces ambiguity to financial health; in the past, income was fairly straightforward, which allowed mortgage lenders to easily assess a person’s income and debt-to-income ratio. The gig economy is fluid, which inhibits the lender’s ability to make a sound assessment.

 

So, what is the solution? We don’t yet have one, but it will likely have to do with technology. We anticipate that mortgage providers will begin to develop a calculator to facilitate the process of better understanding gig economy income. Freddie Mac has already teamed up with a company called LoanBeam to use a patented technology called optical character recognition. This program scans and extracts key information directly from a prospective borrower’s financial documents to calculate a qualifying income that can be used to obtain a home loan. Currently, this process is manually performed, which can lead to extended application times and miscalculations.

The gig economy is not going away, and more workers will begin to rely on its flexibility to supplement their income. Technology will need to catch up to the market, but we don’t see that process taking too long.

 

In a previous article, we detailed the strategies new homeowners can deploy to undercut the costs of a new mortgage. While that article may be helpful for those in the process for purchasing a house, many of our readers are likely to already have a home mortgage. Every person with a mortgage should look for ways to cut costs, so we’ve developed this guide to saving money on an existing mortgage.

Let’s start with why this is important—using simple numbers. Say a homeowners has a 30-year, $200,000 fixed-rate mortgage at 5% interest. That sounds pretty reasonable, right? In fact, if you make your minimum required monthly payments, you’ll end up paying a total of $186,512 in interest over the life of the mortgage. That is almost as much as the principal. Finding ways to cut your mortgage and speed up payments could save you thousands of dollars over the period of repayment. Here are some refinancing options most homeowners can consider.

 

Add One Extra Payment Each Year

Making one extra mortgage payment each year can have significant long-term benefits. Extra payments are applied to your principal, not interest, allowing your balance to drop while preventing you from needing to pay interest on that principal. Using the above scenario, the homeowner can save around $36,000, cutting around 4.5 years off the life of the loan. In the life of your mortgage, paying an extra $1,100 each year, even if you take it from a savings account, can have significant long-term benefits.

 

Begin Making Bi-Weekly Payments

This is a great trick for sneaking in an extra mortgage payment each year. In paying half of your mortgage payment every other week, you will have made 26 payments by the end of the year—13 full payments. Using the above scenario, a bi-weekly payment is around $537. This will allow you to put that additional payment toward your principal, further cutting down on interest.

 

Refinancing Your Mortgage

This is the most common way to save money on a mortgage. By refinancing to a lower interest rate, homeowners can reduce their monthly payments and save money on interest. However, all mortgage holders should understand that there are costs associated with refinancing; you will want to ensure you have enough cash to cover refinancing fees. If you lower your mortgage by just 0.5%, you’ll end up saving around $85 each month. If the refinance itself costs $5,000, you’ll recoup the fees after 59 months.

 

Lump-Sum Payments

This option is not available to most mortgage-holders; if you had the money when taking out your mortgage, the loan amount would have, likely, been smaller. Still, a mortgage holder may come into a large sum of money through a substantial, job-related bonus or inheritance. Putting these funds into your mortgage is a great way to get the most bang for your buck. Let’s use our initial scenario, but say the homeowner receives a $20,000 bonus or cash inheritance. If applied to the mortgage during the first year of the loan, lifetime interest payments will decrease from $186,551 to $131,111—essentially saving you around $55,000 over the life of the loan. Plus, this type of investment will shorten your loan by close to six years. Furthermore, a lump-sum payment doesn’t have to be this substantial—it could be an extra $2,000 the first year, which would save you over $6,500 over the life of the loan.

Mortgage holders may feel they have few options to decrease the costs of their homes, but there are several easily implemented strategies. By investing just slightly more money in your mortgage, you can save thousands of dollars over the life of the loan. Talk with your lender about the options that will work best for your mortgage.