Underwriters make decisions to approve mortgages based on three conditions. Ability to repay the monthly mortgage payment based on income. This is known as ratio qualifying. Generally speaking, a total monthly mortgage payment shouldn't exceed 30% of an applicant's monthly income. The second requirement would be having the necessary money to purchase a property, known as assets to close. The third is credit history. Maybe the biggest factor in determining an approval or denial.

Understandably, good people sometimes experience difficult times. Divorce, Separation, Job loss, Medical circumstances all wreak havoc on the ability to repay outstanding obligations. Whether they are credit cards, car payments, student loans or rent, they are all a reflection of a person's creditworthiness.

Sub-Prime Lending is built on a simple premise; minimize risk to maximum profit. To minimize the risk, larger than normal downpayment are required. Anywhere from 15% to 40% of the sales price based on a case by case determination. Studies have concluded that people are less likely to default on a mortgage if a substantial investment was made.

To maximize profits, higher interest rates are charged. Usually 3%-5% higher than market rates. The final determination again is based on a case by case review. Refinancing is advised once a good payment history has been established. Be aware, however, some sub-prime programs require a pre-payment penalty if the loan is paid off within a certain time period.

One person's qualifications are based on a variety of issues. The overall credit history in terms of the types of delinquent credit, ie. judgements, bankruptcy, foreclosure etc, job history, ability to save money and if a general pattern or credit abuse exist. All of these factors are considered and a rating is established defining the amount of downpayment and interest rate.

Lenders who offered this type of program insist on two absolute requirements. The first is the property must be in good condition. No mortgage will be placed on a property that is in need of maintenance. The second is the buyer must show that at least 5% of the downpayment is their own money. The balance of the downpayment may be gifted or the Seller may provide a second mortgage.

Sub Prime Lending works for many people. Essentially, it provides a short term relief. If a good downpayment is within reach and the slightly higher interest rates are acceptable, people who were destined to rent until "things straighten out" can now buy.

Frank Montufar is associated with Superior Mortgage in Absecon. He specializes in the government backed mortgages, especially the FHA 203-k rehab program. He can be reached at 609-484-9300 or e-mail at ftm203k@aol.com