Are you buying a new house? Or getting a new car? You might have to borrow some money from the market. However, if you have recently taken big loans from the market that are partially returned or if you have any history of defaulting on any previous loans, your credit ratings might not be looking great to a lender. A lender won’t believe what you promise them but only what your credit ratings project. In such times, you might find some lenders talking about a subprime mortgage. Yet, before you sign up for anything, it is essential to know the answer to the question “what is a subprime mortgage?”
What Is a Subprime Mortgage?
A subprime mortgage is a loan that is given to people who have below-average credit ratings. Some lenders might even offer these subprime loans if there are greater chances of you defaulting on a certain loan.
Usually, these mortgages have a larger amount of interest than the lenders charge on prime mortgages. This increment is subjective to the increased risk of defaulting that may happen. Borrowers with a FICO score of less than 640 are more likely to get a subprime loan. If you want to get a prime loan but have a poor credit history, you should try to better your credit score by paying off previous loans.
Four factors will calculate your subprime mortgage’s interest rate:
- Your credit score rating
- The down payment amount
- Number and type of late payment delinquencies on a borrower’s credit report
Subprime Mortgage vs. Prime Mortgage:
Mortgage payments are divided into two categories: subprime and prime mortgage. People who apply for loans are graded from A to F based on how good their credit score history looks. The A to B category gets prime loans, as they are regarded as people with a great credit history and seen as those who can repay the loan easily. Others from C to F get subprime loans with higher interest rates if they are fortunate enough to get a loan.
How Do Subprime Mortgages Work?
History shows us that a large number of this subprime mortgage was never repaid. These loans were subjected to the housing market crash that happened back in 2008. Many homeowners got their homes with the borrowed subprime mortgage loans but could not repay the interest later. They were provided with the “NINJA loans,” which is an acronym for “no job, no salary, and no possessions/assets.”
These mortgages were issued with no requirement of any down payments or needed any solid proof of income. One can even claim-making $200,000 per year without having to prove it before the lenders. When the housing market collapsed, these NINJA borrowers found their property’s value declining with increased interest rates. Their home’s value was lower than the loan they got. Furthermore, the interest rates increased over time and quickly went far high from what they were expected to repay when they first got the loan.
After that, many financial institutions helped people apply for non-prime loans similar to subprime loans. The Neighborhood Assistance Corporation of America, 2018, also started carrying out events nationwide to help people with a credit score of less than 600 get these loans.
The Covid-19 relief provided some more time to the people who were temporarily affected by the pandemic and hence unable to repay their mortgage loans. The government also ensured that no mortgage lenders foreclose on the borrowers before early 2021. In addition to this, the people were allowed to obtain a forbearance (a temporary delay in mortgage payments) if they were severely affected by the pandemic free of any penalty for up to 180 days.
Now that you know what is a subprime mortgage, you may want to look into other options. Contact RateChecker for all the necessary info regarding mortgage rates.