Sub-Prime Lending is hitting the Skids -- What does that mean to you?

Wow!

It seems like everyday a new sub-prime mortgage lender is going down. And when I say down, I mean kaput.

Over the last couple of years these guys were tripping over themselves to reach home buyers with horrible credit. The Swami was able to approve borrowers who have literally never paid a bill on time in their life if ever to buy homes with no money down at all. What a country!

The Swami was approving these borrowers with debt to income ratios of up to 60%. And here is the best part (or worst part). Almost all of these loans were hybrid 80/20 combo loans that only had a fixed rate for two years. After that, the rate turns adjustable and it almost always goes up by 2% the first year.

The standard mortgage broker line to these clients was this: "Take the loan, make your payments on time for two years and then when your pre-payment penalty is up, we will refinance you and put you in a great low, 30 year fixed loan.

Here is the problem, even if you did make your payments on time, it's nearly impossible now to refinance that home because of the slowdown in the housing market. The house you bought 2 years ago is probably worth less today than when you bought it which means that there is no equity to refinance.

Now your interest rate has gone up by 2%. You can no longer afford the payments. You fall behind, stop paying and get evicted. This is now happening to millions of people in the U.S. Now suddenly, the American dream has become a nightmare. What a country!

The result of all this is that these sub-prime lenders that made these loans in the first place are in real trouble and they are beginning to go out of business.

Suddenly, all these great loan programs for first time home buyers are starting to dry up and it is becoming harder and harder to get approved for a mortgage -- especially if your credit history has a checkered past.

The Swami's advice to you:

Before you buy, clean up your credit. It's best if you begin in a position of strength instead of one of weakness.

If you do go with a hybrid loan, the Swmai says: "Make sure that you will be able to afford the mortgage payment after the fixed rate period is over. Don't take your mortgage broker's word for it, he is only trying to make a sale."