Subprime mortgages are mortgage loans meant to help borrowers who are unable to qualify for traditional mortgages that require good to excellent credit histories. Due to the fact of higher risk of default inherent in subprime mortgage lending, subprime borrowers receive higher mortgage rates on their mortgage loans than their traditional counterparts. The subprime mortgage loan terms may also include additional regular fees, or up-front charges.
As defined by the U.S. Department of Treasury guidelines issued in 2001, subprime borrowers usually have weakened credit histories that are inclusive of payment delinquencies, problems such as charge-offs bankruptcies, and/or judgments. Subprime borrower’s credit history may reflect reduced repayment capacity as defined by credit scores, higher debt-to-income ratios, or other credit criterion
Subprime borrowers are individuals with limited income or FICO credit scores below 620 on a range from 300 to 850. The different types of subprime mortgages include:
Initial fixed rate mortgages that soon convert to adjustable variable rates
"Pick a payment" loans that allow borrowers to select their kind of monthly mortgage payment (interest only , interest and principal, or a minimum payment that might be lower than a payment essential in reducing the balance of the loan)
Interest-only mortgage loans, that permit borrowers to pay only interest for a fixed period, typically 5-10 years; after which the monthly mortgage payment may include principal and interest
Subprime mortgages have become immensely popular over the years. Also, lenders are becoming more conservative in their subprime lending practices. However, it doesn’t cost the borrower anything to get a free loan quote and to see if they can get a subprime mortgage.