What Are Subprime Mortgages?

by Catherine Rein
(last updated April 3, 2009)

Every time I turn on the TV these days I hear about subprime mortgages. But what are subprime mortgages? Knowing a little about subprime mortgages can help you save time and money when shopping for a mortgage. A subprime mortgage is given to borrowers with less than perfect credit; typically this is defined as a credit score of less than 620. Credit scores are the measurements banks use to rate a borrower and his or her ability to repay a loan.

Poor credit scores can result in the borrower having to pay higher fees and higher interest rates on mortgages, car loans and other types of loans. You will lower your credit score if you pay bills late or not at all or if you have a foreclosure, bankruptcy or other judgment against you. You can raise your score by paying bills on time and keeping a low balance on credit cards.

Here are the steps for avoiding high fees associated with subprime mortgages:

  1. Research Your Credit Score. Be sure to check your credit score before shopping for a mortgage. If your score is below 620 you'll need to research more carefully for a loan in order to avoid high fees and overly high interest rates. You can find your credit score at any one of the three major credit bureaus: TransUnion, Equifax and Experian. It is best to check all three to make sure there are no errors on your record.
  2. Shop Around. If your credit score is 620 or lower, be sure to shop around for mortgages. With higher credit scores, interest rates and fees tend to be very similar, but because lenders use different methods to evaluate the risk of subprime mortgages you might receive widely different offers from subprime vendors.
  3. Take Your Time. If your credit score is below 620, it might be beneficial to wait before applying for a new mortgage. Address any problem areas and be sure to make all other debt payments on time. If your payment record is good for over 90 days and you don't have other past credit problems, such as a bankruptcy, your credit score will improve.

So what is the difference between subprime mortgages and other 'prime' mortgages? Typically the interest rate will be at least 2 points higher on a subprime mortgage. There will also be continuing costs associated with a subprime mortgage, including mortgage insurance payments, higher late fees and larger fines for delinquent payments.

Author Bio

Catherine Rein

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