What is the Subprime Mortgage Crisis

There is much in the news these days about the subprime mortgage crisis and how it has led to foreclosures in the real estate world. Unfortunately, many news reports chronicle the expansion of the subprime mortgage crisis, but they often do not define. This is due to the erroneous assumption that the audience generally understands what this crisis refers to. Granted, there are those familiar with this crisis, but for those who lack a coherent understanding of what it refers to a more detailed explanation is provided.

In short, there was a five year period that ran from 2000 – 2005 where mortgages were made available to borrowers who were having a difficult time being approved for loans by “mainstream” lending institutions. So, these borrowers sought alternate means of acquiring a mortgage and found their “supplier” in the form of subprime lending institutions. Essentially, the terms and conditions offered by a subprime lender were stricter than a standard bank and, additionally, the interest rates were much higher. This was not done in order to be predatory; it was done because the borrower was essentially a high risk candidate.

Unfortunately, as many of the traditional lending institutions predicted, these high risk borrowers ended up in default of their loans. This has led to foreclosures and in an attempt to avoid foreclosure many of the borrowers opted to dump their property and recoup their losses. With so many houses put up for sale market values plummeted and, as a result, the subprime mortgage crisis of massive foreclosures and devalued real estate has occurred. This has created a crisis and it will be quite a while before this massive real estate crisis eventually stabilizes.

Qualifying Property Prior to a Purchase

Let’s say that you are driving your car down a stretch of road and you see a beautiful home. Lo and behold, it would appear that this gorgeous home has a for sale sign on its property. It would seem that the gods have smiled upon you as purchasing the home is all you can think of. There is the problem: all you are thinking of is purchasing a home based on its personal appeal to you. Now, it goes without saying that one should purchase a home that is appealing, but there are also practical and pragmatic issues that need to be taken into consideration before making such a purchase. This should include performing a solid and reliable method of qualifying the home first.

On the surface, some may assume that qualifying the home is a complicated procedure. While it is definitely not a cursory venture, it is also not one that is overly complicated either. Basically, what qualifying the property entails is ascertaining the various financial aspects associated with it. For example, what is the market value of the home and what have similar homes in the same area been selling for? If this is a home that is in foreclosure, how much of the remaining mortgage balance does the property owner owe? What is the condition of the home? Is repair work required and what would the costs be? As you can see, answering these questions add additional spheres to an individual’s ability to make a decision as to whether or not the property is worth purchasing.

The Straight Lease vs. the Graduated Lease

When it comes to real estate investments many people opt to purchase property with the desire to rent the property out and draw rental income. This has long since been proven a solid means of recouping one’s financial expenditure. It has also provided the means of making a profit from the initial investment. Of course, in order to make such a process workable it is necessary to have a lease put in place so as to secure income. The alternative option would be to simply allow the person to rent month to month, but the ability to draw an income when there may be extended periods of time when the property is unoccupied because the renter moved out is a foolish option. Again, a lease should be put in place so as to secure the rental income. There are a number of different types of lease options one could utilize, but the two most common are the straight lease and the graduated lease.

The straight lease is the most common leasing option available and it simply involves affixing a specific price over a specific period of time. For example, if one opts to rent out a home the lease may set the terms at $1,000 a month for a period of 12 months. The individual, of course, is then obligated into 12 month agreement without breaking the lease. A graduated lease is similar to the straight lease, but the property owner reserves the right to increase or decrease the amount of the lease either at will or within certain agreed upon conditions. Generally, graduated leases are rare, but they have been employed by landlords who discover their tenants may be problematic or are causing property damage or simply because of rising taxes or real estate value.

What the Seller has to Gain by Dumping a Foreclosed Property

Some individuals can be very hardheaded and when they have their minds set on something the ability to change their minds can be quite a complex task – even when changing one’s mind or course of action would be far more beneficial than following the same course. Case in point, when an individual falls into financial hardship and is facing foreclosure on their home they may resist offers to sell their home. This, while noble, can turn out to be a thoroughly disastrous venture. As such, it is critical to point out to the homeowner that selling the property may very well be in his or her best interests.

If there was one basic, simple psychological appeal that could be made to the homeowner it would be that foreclosure positively, must be avoided at all costs. The reason for this is that with foreclosure proceedings there come a number of catastrophic hassles that may cause irreparable harm to the homeowner. For example, if a home is foreclosed upon the credit rating of the homeowner will be devastated for a full decade. Of course, one could also seek protection against the creditors by filing bankruptcy, but bankruptcy has become significantly more difficult to qualify for as laws centering on the requirements for filing bankruptcy have become much stricter. Additionally, the damage done to a person’s credit rating due to a bankruptcy would make borrowing money next to impossible. As such, it is significantly better to sell the property outright on your own terms than it is to suffer the disaster of having property foreclosed upon.