A subprime mortgage loan is a type of home loan that is given to borrowers with poor credit history, often below 600. These individuals often won’t be able to qualify for traditional loans due to poor credit or other factors that indicate high risk for default on a loan. Subprime loans can include down payments of as low as 3% and have looser underwriting requirements than traditional loans.
Higher interest rates and additional fees are applied to counterbalance the increased risk taken on the part of the lender, since borrowers of subprime loans have a statistically higher default rate. In comparison to traditional loans, this extra interest can add up to tens of thousands of dollars’ worth of additional payments over the life of the loan.
The interest amount of subprime or bad credit loans, are not necessarily uniform among lenders. Risk assessment on your ability to pay the loan will vary from lender to lender. This can help consumers of subprime mortgage products save money by shopping around.
There are many other types of subprime lending options. Three government agencies that are responsible for backing subprime loans are the VA, USDA, and FHA. All of these agencies ensure loan products that offer low or no down payments for those who qualify. These loans tend to have higher interest rates, but offer affordable loans for single and multifamily homes.
The most common type of subprime loans is the adjustable rate mortgage, or ARM for short. One of the most prevalent ARM loan products on the market today is the 2/28 ARM. Initially, these adjustable rate mortgages have fixed interest rates over for a determined amount of time, and then fluctuate based on a benchmark index. Many of these loans have a sharp increase in the interest rate after 2 years. This can be beneficial if the borrower plans on refinancing after the 2 year fixed rate period has ended.
Many of those who have poor credit history or a small amount of cash for the down payment will have trouble getting a conventional loan. The borrower’s overall ability to pay is not determined only by credit, but it is a large part of it. Missing a few payments here or there doesn’t mean that you’ll have to get a loan with high interest rates. The only way to find out what a lender will value your worth as a borrower is to speak to a real estate professional.
Below are some general guidelines for borrowers that outline if they may want to apply for a subprime or bad credit loan.