What Is A Subprime Loan?

Subprime mortgages are loans that are available to borrowers with low credit scores. These are typically people with lower credit scores than 600 who cannot be approved for conventional loans. These borrowers may also have a poor credit history or derogatory credit. There is no standard for what constitutes subprime loans. You'll see "non-qualifying loans" (or non-QM loans) more often today. These are home loans that don't conform to the Qualified Mortgage rule.

Borrower Classifications

An A-paper loan is a loan that is granted to borrowers who have a track record of timely and full repayment. This generally refers to borrowers who have:

• Credit rating:

• Can they document their income?

• Their ratio of debt to income is not higher than 35 percent

• You can make a 20% down payment

Borrowers with poor credit scores are assigned a classification, such as A-minus, B, C, or D-paper loan. These classifications indicate the credit risk. The interest rate on loans will be higher if there is a higher level of credit risk.

Alt-A, another type, is a loan without full documentation or with a higher LTV and DTI. These loans are available to borrowers who have recently filed for bankruptcy or foreclosure, as well as those who have late payments. These loans are intended to provide temporary financing for the applicant and to help rebuild their credit until they can be eligible for conforming "A".

Based on the borrower's credit history and financial situation, interest rates and programs can vary. These loans are significantly more costly than any other type of mortgage loan.

Subprime Loans: Risks

Subprime mortgages offer people with bad credit the opportunity to enter a previously unaffordable market with standard loans. However, there are many risks. For example, subprime loans have a higher risk of default which means that the borrower may not be able to pay the loan.

Subprime mortgages have had a dramatic impact on the U.S. housing market and economy. As a result, lenders also suffered, with some even going bankrupt.

The subprime market has another negative aspect: the rise of predatory lending accusations against lenders targeting minorities. Inexperienced borrowers are often preyed upon by these lenders. For example, to set high-interest rates, they may lie about your credit score, overvalue your property, or overstate your income.

They encourage frequent refinancing to obtain a "better rate" and then add the high closing costs to the loan. These practices were almost eliminated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2008. Subprime mortgage lending today is more focused on helping borrowers who are creditworthy but have been adversely affected by the mortgage crisis.