Definition Of Sub-Prime Mortgages
Subprime mortgage loans are available to borrowers who do not qualify for conventional loans because of their low credit ratings, histories of bankruptcies, and other factors that suggest that they are higher than average risks of default. Sometimes lenders will make mortgage loans at subprime rates to borrowers who have very limited or no credit history.
While traditional loans are made to borrowers who have strong credit histories and can demonstrate the capacity to repay their loans, subprime loans are made to borrowers who have been identified as deficient in credit history, having the potential to not repay the loan, or both.
Interest Rates On Sub-Prime Mortgages
The interest rates on subprime loans are significantly higher than those on traditional and other nontraditional loans because of the increased risk. Additional percentage points can easily add up to tens of thousands of dollars over the life of the loan.
|After the housing market collapsed in the wake of the subprime mortgage crisis, many lenders stopped making subprime mortgage loans. While some lenders are now offering these products again, the loans are much more costly this time around. Now, lenders are charging higher interest rates, requiring larger down payments (in some cases, as much as 25 to 35 percent), and verifying borrowers’ income, employment, and credit.|
Mortgage With Bad Credit
Making subprime loans is not illegal or unethical. In fact, in limited cases, subprime mortgages can make financial sense. Individuals who have had a history of compromised credit, when they are back on their feet, can use a subprime mortgage to rebuild credit. The most expedient way to rebuild credit is to make timely and full payments on a mortgage, whether it is a subprime mortgage or not. Often subprime mortgages are refinanced when borrowers’ credit histories have sufficiently improved and they are able to qualify for a better quality loan. Some borrowers have no choice but to accept subprime loans if they want to become homeowners. In any event, subprime loans should be approached with caution.