What is a Subprime Mortgage?

The term "subprime mortgage' or even "subprime loan" is misleading as it's not the mortgage or loan that's subprime but the borrower. A subprime mortgage is simply a home loan granted to subprime borrower.

What is a Subprime Borrower?

A subprime borrower is someone with below-average qualifications for credit. Generally a subprime borrower has poor credit, with a credit score in the low 600s or lower. In certain cases, individual lenders may also consider a borrower subprime if they have a respectable credit score (meaning in the high 600s or higher) but cannot afford to put more than 5% down on the home. In either case, the consequence is the same - a subprime mortgage.

What's a Subprime Lender?

A subprime lender is any lender that originates a subprime loan. It sounds obvious, but the trick in the question comes in when you consider how many people think there are subprime lenders and prime lenders, and never the 'twain shall meet.

Sure, there are lenders that solely originate subprime loans. These are the ones with "Acceptance" and "Consumer" and "Finance" and other buzzwords in their names .

More often however, a lender is willing to make prime and subprime loans, and determines whether or not to do so, based on their particular policies and each borrower's individual situation.

It is important to know this as many borrowers make the mistake of believing their options for getting a subprime mortgage are restricted to those non-federally regulated, privately-held companies that send direct mail marketing to your home and advertise on late night TV.

What's the Difference Between a Subprime Mortgage and a Prime Mortgage?

The key difference to you, the borrower, is the overall cost of the loan. A subprime mortgage is much more expensive than a prime mortgage as the borrower is paying extra in order to compensate/protect the lender for having taken on the extra credit risk. The extra cost of a subprime loan shows up mainly in paying an interest rate that's higher than the prime rate.

Home Ownership is Possible

Even for you. Although the current economic climate has led to fewer subprime mortgages being offered than of late as well as a tightening on subprime borrower qualifications, subprime loans are still being originated today. It may be more difficult to get a subprime loan today than several years ago. But it is still doable. It's not too late to get into that home of your dreams. As your trusted lenders about the subprime mortgages they offer and the qualifications for approval.