Any consumer who can reliably meet his financial obligations is creditworthy. Being creditworthy is very important if you are looking for mortgage loans. The financial institutions receive sustainable returns by lending to the creditworthy consumers. They need not do any collection calls to such customers and there is noticeable reduction in overheads, as the desired collateral against the mortgage loans are less.
Thus, it is a persistent endeavor of the banks to come up with different financial models and mortgage schemes to attract the creditworthy customers to them.
The banks usually request for the data on the creditworthiness on any individual from the credit bureaus, in the respective countries, for a small fee. These credit bureaus track the financial transactions of each individual and accordingly model the behavior, spending pattern, pending loans, job shifts etc on the past inputs.
Finally, these credit bureaus analyze this data and decide on the credit worthiness of any individual or institution. A neat and clean financial history usually results in the high credit worthiness.
Banks Ways of Attracting Creditworthy Clients
The lending banks or financial institutions attract the credit worthy clients by giving them low rate of interest, flexible payment plan, discounts on the regular payments or reducing the loan term. The banks may not ask for much collateral against loan if the credit report of the prospective client is good. Thus, it is always better to have a good credit history at the credit bureau and to keeping the accounts clean. You may also check your credit report on a preemptive basis and provide correct input to bureau if you feel that there is something amiss.
SubPrime Lenders and Mortgage Loans
This is one of the important as well as interesting consumer niches of the mortgage loans. While the mortgage loan to the creditworthy customers is called prime lending, sub-prime lending is the word for mortgage loan to the non-creditworthy consumers. This is also known as non-prime, near prime or second-chance lending. These loans are given to the consumers who are considered as belonging to the riskiest category and these loans are sold in the market, which is different from the prime lending market.
The sub-prime lending term gained popularity on the year 2007 when the recession or the “credit-crunch” was attributed to this sector. There is no agreed definition on the sub-prime sector but a borrower with a credit score of below 640 (FICO score) is considered as sub-prime borrower. The sub-prime lending practice exists as these individuals would not otherwise have access to the credit market due to their bad credit rating.
The sub-prime lending started in US in 1993 when there was a high demand of providing loans to the borrowers who were high risk and had imperfect credit report. The prime interest rates were low resulting in the negative interest rates. Hence, the situation was such that the more you borrow, the more you earned.
Statistically, 25% of the loans market was sub-prime, or possibly more than this figure ! This was seen as huge market, waiting to be tapped, by lending banks. Thus, the lenders vigorously started targeting the sub-prime segment albeit at higher interest rates, much collateral and tough repayment terms.