What Are Subprime Loans?
There are many different loans and mortgage products that were made popular in the early 2000’s. In fact, it can almost feel like you didn’t know where to begin! One type of home loan that received a lot of media attention is the subprime mortgage. But what are subprime loans? Have you seen The Big Short? Do you know who Elizabeth Warren is? Read on to discover what used to be the subprime mortgage loan.
PLEASE NOTE, WE DO NOT OFFER SUBPRIME LOANS.
What are subprime loans?
A subprime mortgage is one that is typically issued to a borrower who has a poor credit rating. Conventional prime mortgages are not generally offered to borrowers that have low credit ratings because the lending company considers the borrower as being at too great of a risk in terms of defaulting on the mortgage payments.
Lending companies will tend to charge interest on subprime mortgages at a considerably higher rate when compared with traditional prime mortgages. They do this to compensate for the greater risk. These mortgages tend to be adjustable-rate loans as well (2/1 arm), which means that the interest rate could possibly increase at specific points in time.
Characteristics of subprime loan borrowers
Some of the most common characteristics of subprime loan borrowers are as follows:
- High cost loans
- Poor loan terms
- 2/1 or 3/1 arm
- High risk of default
- Had a foreclosure within the past two years
- Has been bankrupt once in the past five years
- Loan payments or credit card payments have been delayed
- Poor credit history
- A high debt-to-income ratio that is equal to or exceeds
- A poor credit score
- Low income
What are the different types of subprime home loans?
There are a number of different types of subprime loans, so let’s take a look at some of the most common below:
Fixed-rate subprime loan - With this type of subprime loan, the interest rate will stay the same for the full duration of the loan. Nevertheless, the duration of the loan tends to be longer than the average home loan. For example, it could be 50 years rather than 30 years.
Interest-only subprime loan - This type of loan is structured in a way that borrowers will only pay the interest part of the loan throughout the early days of the agreement. This means that the mortgage payments can be more affordable, to begin with. Nevertheless, when payments increase at a later date, the difference can be quite steep, so you would need to prepare for this.
Dignity subprime loan - With this type of subprime loan, the borrower would be required to put down a down payment that is equal to 10 percent of the subprime loan while accepting a higher rate of interest for the beginning period of the loan. Should the borrower meet these requirements, the interest rate will reduce over time until it reaches a prime rate.
Adjustable-rate subprime loan -The interest rate is going to remain the same for the starting period of the loan. However, it will change to a variable rate at a later date.
Getting a subprime loan - * Not Available *
In most cases, a FICO score range of between 500 and 660 was considered applicable to subprime borrowers. However, it is important to note that this is not always the case. It does differ from lender to lender, as all mortgage providers have their own requirements. Please also note that just because you may have a credit score between 500 - 660, you may qualify for superior mortgage programs as subprime loans are no longer offered and are outdated. Subprime loans also were labeled as a big piece of the financial crisis of 2008.
By using a credit score, applicants can be segmented into different categories. Nevertheless, it is up to the lender to determine whether or not an applicant is a good fit, just as they would with a conventional mortgage. Checking your credit score is a good place to start, though, when determining whether or not this is the right solution for you.
Final words on what are subprime loans?
We hope that this has helped you to get a better understanding of what subprime mortgages are and how they work. Whether or not a subprime loan is right for you depends on your individual circumstances. It may make more sense to try and build your credit rating and apply for a mortgage once improved. This is something an experienced mortgage broker may be able to help you with or provide proper guidance. We do not offer subprime mortgages are not offered,
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