Learn Who Is Qualified for Sub-prime ARM Freeze
In December 2007, after several weeks of meetings between government officials and other interested parties, the Bush administration adopted a plan to freeze subprime adjustable rate mortgages — or "ARMs," as they're more commonly known. While the executive body's freeze plan may be well-intended, and is designed to convert subprime ARMs into loans that can be sustained for longer time periods, the number of borrowers that may be helped appears very limited.
According to the New York Times, the proposed subprime ARM freeze will allow borrowers to keep their low introductory mortgage rates intact. It would also allow them to avoid increased rates of up to 30% once the old rates expire.1 But the bottom line is that experts say that only about 12% of all subprime borrowers — or roughly 250,000 U.S. homeowners — would directly benefit from the plan.1 Borrowers must also have a credit score at or below a certain minimum to even be considered — which may well open the door for credit problems down the road.
Credit score requirements for the subprime ARM freeze plan at glance
So what does all this mean for you? Well, beyond the fact that the ARM freeze will only help a select few, all borrowers must meet the following specific credit score requirements and mortgage payment minimums to qualify for the proposed five-year plan2:
- Payments must be no more than 30 days late at the time of the freeze
- No payment made within the last year can be more than 60 days late
- Borrowers must have less than 3% total equity in their homes
- Borrowers must already have an ARM that will reset in 2008 or later
- Borrowers must provide documented proof that higher reset payments can't be made
- Borrowers must have a credit score below 660
That last point can easily create problems for people looking to grab a "quick financial fix" from the subprime ARM freeze plan. For example, since qualifying for the freeze requires a credit score below 660, this sticking point could persuade you to purposely lower your credit score.
In the simplest terms, trying to lower your credit score is not only short-sighted; it's dangerous to your overall credit history.
Lowering your credit score to meet below 660 requirement: Is it worth it?
The cornerstone of the American dream has always been owning a home. Purchasing a home and then making mortgage payments after that is by far the biggest financial commitment most of us will ever make. But that doesn't mean that you can afford to sacrifice your overall credit record to better afford that dream home.
Your overall finances can be compromised easily enough just by the ever-changing nature of the economy. Think about it: fuel prices go up and down; so does the stock market, the real estate market and many other transitory things you just can't control. So why would you risk giving up controlling your credit? Don't forget that purposely lowering your credit score is not only dangerous — it's not that difficult either. And remember that your credit report is a lot like your lifetime financial report card. By lowering your credit score, you're giving up on all the savings and deals that a good credit score can bring you.
Every credit-related decision you make can have some effect on your financial future. Specifically, lowering your credit score on purpose could affect your ability to open up new accounts, qualify for higher lines of credit or even keep your insurance premiums low. So don't take unnecessary risks. Continuing to keep careful track of your credit record and protecting your credit history is always a smart move.
As for the subprime ARM freeze plan, even if you do qualify for this potentially fleeting home financing option, there are no guarantees of even short-term help. That's why managing your credit requires a long-term plan — especially when it comes to home buying.
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