Another reason why the market crashed a little over 10 years ago is because of subprime mortgages. What is subprime mortgages? Basically it was a loan given out to individuals with low credit score but with a higher interest rate. If your credit score was below 600 you could apply for a subprime mortgage and become a home owner! Great news right?….problem is monthly mortgage was higher than what people could afford. Once people started defaulting on their loan they could no longer afford to own the home.

The reason why mortgages was higher than everyone else’s was because banks increased the rate for the risk they were taking on giving people the loan. Let’s put this in a scenario. John Doe who has a 500 credit score wants to purchase his dream home so he goes to the bank and the offer him a subprime mortgage. Due to his credit score, his number of late payents (car, bills, ect.) and delinquencies the bank tells John that his monthly mortgage is 1800 per month. “We are risking $250K for you to own this home and your past shows you have been late on payments” says the bank.

Soon John starts to fall behind on his home loan, he can’t afford to pay it any longer and goes into foreclosure. This scenario happened to countless of people during that time period which is one of the reasons the housing market crashed.

WHOS AT FAULT???

Lenders now take a in-depth look on your credit history and payment history and help you build up your score before they offer you a loan. I have seen lenders advise clients on how to build their credit score what they need to do to prove that they will be reliable and trustworthy for the future so that they don’t make the same mistake as before. They sure won’t give them a loan for something they can not afford, that’s like giving a gambler more money to try and will back his losses but with a higher interest rate…at the end it will not work!