A Subprime Mortgage Is a Home loan that allows individuals with a limited credit history, or subprime credit to purchase or refinance the loan. The Subprime Mortgage Loans have interest rates that are higher than the prime rate. These Mortgage Loans give borrowers with impaired credit a means to buy homes but with risks.
A Subprime Mortgage Loan provides an opportunity for low-quality borrowers to purchase their homes and other goods. However, if these borrowers default, owing to higher interest rates, it will lower their credit score further. The Subprime mortgage can come with fixed-rate mortgages, adjustable-rate mortgages, or interest-only terms.
The term “Subprime” refers to the below-average credit score of the borrower taking out the mortgage, indicating that they might be a credit risk. The rate of interest associated with the subprime mortgage loan is usually high to compensate lenders for taking the risk that the borrowers will default on the Mortgage Loan.
What Is Subprime Mortgage?
A Subprime Mortgage Loan is a home loan offered to individuals who are unable to qualify for conventional mortgage Loans. The Subprime option is available in many types of loans including personal loans and auto loans. Subprime mortgage Loans come with high interest rates and are usually given to borrowers with credit scores below 620. Subprime mortgage loans give borrowers with poor credit histories a means to buy homes, but there are substantial risks involved.
Subprime mortgage loans are often adjustable-rate mortgages and come with initial low-interest rates. The initial rate can make payments manageable in the beginning but it will expire after a period of time. Once the initial rate expires then the rate of interest will adjust based on current market conditions. Subprime mortgages also known as non-prime mortgages, are for borrowers with lower credit scores, which prevent them from being approved for conventional mortgage loans.
The Interest rate associated with the Subprime Mortgage Loan is dependent on four factors including credit score, the size of the down payment, the number of late payment delinquencies on a borrower’s credit report, and the types of delinquencies found on the report. Subprime mortgage loans tend to charge higher interest rates than conventional mortgages and other traditional forms of financing such as FHA Loans, and VA Loans which are the federal government guarantees.
What Are the Benefits of Subprime Mortgage?
Subprime Mortgage Loans have the following benefits:
- Higher Rates: In Subprime mortgages, the borrowers generally have poor credit scores and other financial challenges. This means it is much more risky for a lender to offer subprime mortgage loans than a traditional mortgage. To offset that the lenders charge the higher interest rates in Subprime mortgage Loans.
- Higher Down Payments: Some lenders offset the risk of Subprime mortgages by requiring higher down payments as much as 25% to 35% depending upon the type of the loan.
- Higher Payments: On the Subprime mortgage loans, the borrowers will likely have to pay the higher interest rates. This means that they will saddled with a higher payment every month.
- Longer Terms: On the Subprime Mortgage Loans, the terms are typically for 40 to 50 years. However, with conventional mortgage loans, the repayment term to 15 or even 30 years.
How Does the Subprime Mortgage Loan Work?
The terms “Prime” and “Subprime” refer to the interest rates given based on the Borrower’s credit report. If we talk about the Prime mortgage loans then these Loans come with the lowest interest rates and are reserved for borrowers with excellent credit. However, in Subprime Mortgage Loans, the borrowers have poor credit reports and will qualify for loans with higher interest rates and less favorable terms. Subprime mortgages are regulated by the Consumer Financial Protection Bureau (CFPB). It is the agency that was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in response to the subprime crisis.
Requirements to Qualify For Subprime Mortgage Loan?
In order to qualify for the Subprime Mortgage Loan, The borrowers have the following requirements:
- Low income
- A credit score below 620
- A debt-to-income ratio equal to or greater than 0.5
- Poor credit history
- Credit cards or loan payments are delayed
- Have been bankrupt once in the past 60 months
- Had a foreclosure in the past 24 months
- New business, retiree, or self-employed
Eligible borrowers who have any of the above characteristics can secure a loan, However, it becomes more difficult. The borrowers need to resolve any debt or credit issues before applying for the Subprime Mortgage loan to increase the probability of approval and reduce the interest rate applicable to the loan.
What Are The Types of Subprime Mortgage Loans?
Some of the common types of Subprime Mortgage Loans are as follows:
- Fixed-Rate Subprime Mortgage Loan: The interest rate for Fixed-Rate Subprime Loan remains constant for the entire duration of the loan. However, the loan duration is usually longer than the average loan. These Mortgage Loans typically come with a repayment term of 15 or 30 years and loans can last 40 to 50 years.
- Adjustable-Rate Subprime Loan: The Interest rates of Adjustable-Rate Subprime Loans remain constant for an initial period of the loan and later change to the variable rates. The rate of interest on the later period of loans will vary along with the market.
- Interest-Only Subprime Loan: The borrowers pay the interest portion during the early period of time in the Interest-Only Subprime Loan. The monthly payments of the loans are more affordable, however, when the payments are increased in the later period, the difference can be quite steep.
- Dignity Subprime Loan: These Loans combine subprime loans and conventional mortgages. The borrowers make the 10% down payments on the property and agree to pay the high-interest rates for the first five years of the mortgage loan.
Subprime Mortgage Loans Reviews
Subprime Mortgages are more expensive Loans, they have typically higher interest rates and are meant for borrowers with poor credit. These borrowers may be less likely to keep up with their mortgage payments, and more likely to need a loan modification or end up in foreclosure. Here are some of the pros and cons of Subprime Mortgage Loans such as:
Pros:
- For eligible borrowers whose credit needs work, subprime mortgage loans might be your only option to get into a home.
- Subprime Mortgage Loans often have unique structures, such as an interest-only period, that might work in your favor in the short term.
- The Subprime Mortgage Loan provides borrowers with bad credit histories or below-average credit scores with an opportunity to obtain financing and purchase a home.
Cons:
- Subprime Mortgages Loans have considerably higher interest rates, which increases your all-in costs.
- With the Subprime Mortgage Loans, you’re not just limited in loan choice, you will also be limited in terms of lenders to compare.
- With the Subprime Mortgage Loans, the Closing costs and other lender fees will also be higher.
Frequently Asked Questions (FAQs)
Question 1: Who offers the Subprime Mortgage Loans?
Answer: Any financial institution could offer Subprime Mortgage Loans with subprime rates, however, some lenders focus on subprime loans with high rates.
Question 2: Who are Subprime Mortgage Borrowers?
Answer: Mortgage applicants with poor credit scores, and negative items on their credit reports are often considered as the Subprime Mortgage Borrowers.
Question 3: How Do I get the Subprime Mortgage?
Answer: Once any eligible borrowers find a lender, then they will know about to apply for the mortgage Loan. This means they will need to supply proof of income via bank statements, W-2s, and tax returns. Once the borrowers have supplied all the information requested, their lender determines if they are viable candidates for the Subprime mortgage or not.
The Final Verdict
Subprime mortgage Loans are home loans that are designed for Homeowners or Homebuyers who are not able to qualify for a mortgage loan due to their poor credit score, previous bankruptcy, foreclosure, or other adverse financial history. But a Subprime Mortgage loan offers an opportunity for Borrowers, who require higher down payments and charge higher interest rates than prime loans.
