Subprime Mortgage

When a borrower applies for a mortgage loan, the borrower undergoes a credit score and history review by the lender. In cases in which the borrower receives a poor credit score, or has negative items on their credit report, the mortgage is considered subprime. Some lenders may use the term nonprime as opposed to subprime although it bears the same meaning.

Typically borrowers with a credit score below 660 aren’t approved for a conventional mortgage.

Other factors in a borrower’s credit history can also affect their approval chances. This includes:

  • 2 loan payments or more that were late by 30 days or more in the past year.
  • 1 loan payment that was delayed for 60 days or more in the past year.
  • Individuals that have experienced a court order, foreclosure, repossession or charge off in the past 2 years
  • A debt-to-income ratio of 50% or higher
  • Went through bankruptcy proceedings in the past 5 years

Due to the risks involved for lenders with borrowers with spotty credit histories or low credit scores, Subprime or nonprime mortgages are offered instead.

Subprime mortgages are usually offered as fixed rate or variable rate mortgages similarly to most mortgages. Unlike standard mortgages, there are a few things that are different. This primarily includes higher down payment requirements that can reach 25-35% of the home’s value. Another caveat is higher monthly payment amounts due to higher interest charged by the lender. Some lenders may only offer longer terms for subprime mortgages than the standard.

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