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To begin, subprime mortgages are loans to borrowers with weak credit. Usually, "bad or weak credit" associate to scores that fall below 620. Your credit score may fall into this category if you have a history of payment delinquencies, bankruptcy and/or court judgments.
Subprime loans may not actually be mentioned by name, however they expose themselves through higher interest rates. Subprime lenders may offer a variety of products to potential borrowers, trying to take advantage of those seen as "desperate". Thus, it always wise to shop around and seek professional guidance.
Factors that affect subprime rates:
- Credit Score
- Size of Down payment
- Delinquencies owed by Borrower
Subprime loans also come with many risks such as prepayment penalties and/or balloon payments. A prepayment penalty is a fee assessed against the borrower for paying the loan early because a borrower sells a home or refinances a high-rate loan. A balloon payment requires the borrower to pay off the entire outstanding amount in a lump sum after a certain period of time has passed. If you can't pay a balloon payment then you will be forced to refinance or sell the house.
Predatory Loans
The subprime industry has been blamed for high foreclosure rates and an unstable housing market. Some subprime lenders have focused their efforts on low-income families with a track record of poor money management. Fooling ignorant borrowers into outrageous fees and high interest rates, these types of lenders will often lie to borrowers about their options and credit score. They often approve borrowers who won't be able to afford a home and convince people to refinance their home in an effort to charge high closing fees.
It is important to educate yourself when it comes to obtaining a mortgage, especially if you have shaky credit. Be sure to do your research and determine what you can afford. Predatory lenders thrive on naïve borrowers, so it is important that you do not become one of them. Good luck!
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