Subprime



“Subprime” is a euphemism for a borrower who simply doesn't qualify for a traditional home mortgage. Subprime loans used to be very difficult to get, but things changed in the 1990's. Banks began to realize there were a lot of borrowers with less than stellar credit or other problems. More borrowers meant more revenues, so banks started creating subprime mortgages and the game was on. As a result of these new loans, home ownership in the United States has risen to all time highs.

One of the biggest determinants in qualifying for a loan is your credit score. A borrower's credit history is analyzed using a “FICO” score, named after Fair Isaac and Company, Inc. Generally, a FICO score below 620 is considered an indication of bad credit. The borrower is then classified as a subprime borrower.

Importantly, a FICO score below 620 is not the only reason a person may be classified as subprime. An infrequent borrowing history, new employment position or expensive home may also key the designation. In fact, nearly 50 percent of subprime borrowers have FICO scores above 620.

When a lender writes a mortgage, it is betting on whether the borrower will repay the loan completely and in a timely manner. The better your credit score, employment history and so, the better deal you will get from the lender. Obviously, subprime borrowers aren't going to get the best deal. Instead, a lender may require a larger down payment and will certainly designate a higher interest rate than given to “good” borrowers. In addition, subprime borrowers may have to pay points just to get the loan.

The trade off of all of this, of course, is that you get a loan to buy a home. Home ownership has consistently proved to be one of the best long-term investments in the United States. While Americans are criticized for failing to save money, they are effectively doing so by purchasing homes and building equity in them.

Should you apply for a subprime loan if you have less than stellar credit or other problems? There is no right answer, so you should consider sitting down with an independent mortgage broker to analyze your situation.