What is Subprime Loan

A subprime loan is a mortgage loan that is made to an individual with poor or bad credit. These are typically individuals that would have poor credit scores of 620 and below.

Because of their poor credit scores, subprime borrowers do not qualify for traditional loans or government loans such as FHA and VA loans. And currently, subprime loans represent 15% to 25% of the total mortgage market.


Because of their poor credit rating, subprime loan borrower’s present increased risk to lenders. Many times, the reason the home buyer has a poor credit rating has to do with the fact that they have a significant amount of debt, and are having a difficult time making the payments. As a consequence, the subprime borrower tends to get behind with his home payment. It is forecast that a significant number of the subprime loans made in the past several years will fail.

Because of the risk called for, banks will overcompensate in many ways: They may require higher down payments. They require higher interest rates, which can be as much as 10 percent higher than the rate for traditional loans. The lower the purchasers credit score, the greater the loan rate. Also lenders charge higher fees and closing costs for subprime loans.

Additionally, a high percentage of subprime loans have prepayment penalties. The majority of home loans do not have a prepayment penalty, because most borrowers tend to keep their loan for a long period of time. A subprime loan is normally seen as a short term solution, and the lender wants to be sure they get enough return for the risks they incur. If your loan has a prepayment penalty, be sure to learn what the penalty is and how long it will last.

Before getting a subprime loan, check with other lenders, because a substantial number of subprime borrowers really have credit scores that would qualify them for traditional loans. By shopping around, you can save substantial amounts of money on closing costs as well as obtain a lower interest rate. A subprime loan should always be thought of as a short term solution.

A home owner should get out of a subprime loan as quickly as possible, because refinancing a subprime loan will save the borrower a substantial amount of money on interest payments and will lower the monthly payment. If you have poor credit, you can try to mend your credit by ensuring all of your monthly bills are kept up to date and the loan balances are paid off. By practicing this, you should be able to qualify for a much lower interest rate.

If a subprime loan is the only option available, it may be a better option to postpone the purchasing the home. By repairing your credit score and paying off some of your other debts, you will improve your credit score and be able to get a much lower loan rate.

Sydney Heiden.

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