Subprime Mortgages

Individuals with rough credit often find it difficult to getting a new mortgage. It is often very difficult to obtain a new mortgage after foreclosure and credit problems such as foreclosure often make it impossible to obtain a new mortgage. However, if your credit problems are more minor, credit flaws will not necessarily completely prevent you from obtaining a mortgage. A subprime mortgage is often the answer for these individuals.

A subprime mortgage is for borrowers with credit scores under 620. Credit score range from 300 to 900. Most consumers today tend to land in the 600 to 700 range. People who are habitually bad at paying bills on time and who have debts that are 30, 60 or 90 days in delinquency will have an even lower credit score.

The term "subprime" describes you or the loan, but few lenders will use this term. They do not want to lose a sale by offending a borrower by labeling them. Some lenders will not refer to the loan by any other term other than a mortgage. Subprime mortgages are not considered a commodity to the lender, as individuals with excellent credit are considered. If you are in the subprime category, then you will receive a range of different offers from various lenders. This makes it very important to shop around and get the best deal that is available.

These loans will have higher rates than equivalent prime loans and lenders may use a process called "risk-based pricing." This is what is used to determine the mortgage rates and terms for subprime borrowers. The rates are higher because a person with poor credit is a risk to loan to. The rate will depend on several factors including the credit score, the size of the down payment offered and the delinquent debt that the borrower has from the past. It will most likely be higher if you have missed any previous mortgage payments from another home. These missed payments are weighted higher than late credit card payments, for example.

These loans will also require a prepayment penalty or a balloon payment and sometimes both. The prepayment penalty is a fee that is assessed if the borrower pays the loan off early. This may be because the borrower sells the house or refinances. A balloon payment will require that the borrower pay off a lump sum after a certain amount of time has passed. Some lenders will require this after five years. If the borrower is not able to make the balloon payment, they may be required to refinance or sell the house. Many lenders will use these penalties and payments as a method of getting the borrower a lower interest rate in exchange for these penalties or payments. These penalties and payments, however, are associated with higher foreclosure rates, as the borrowers are unable to pay the penalty or balloon payment and may not have enough equity to refinance or may not receive enough from the sale of the home to pay off the debt.