QandAs: Loans

What is a Sub Prime Mortgage?

Answer:
A sub prime mortgage is a home loan granted

to persons with less-than-perfect credit. Sub prime borrowers do not meet the loan criteria set forth by mainstream lenders. To be eligible for a home purchase, these individuals require a loan intended for high-risk applicants. Because sub prime mortgages have a higher default rate, many lenders avoid these types of loans.

Moreover, lenders that do offer sub prime mortgages offset the risk by charging a much higher interest rate. While the interest and payments on a sub prime home loan are higher, many borrowers readily accept the loan terms, and strategize a plan to improve their credit. Borrowers who increase their credit score can refinance and obtain a lower rate in the future. A credit score below 620 categorizes a person as a sub prime borrower. Likewise, sub prime mortgages help persons with two or more late payments within the past 60 days, judgments, bankruptcy, repossession, and foreclosure.

There are various types of sub prime mortgages. These include interest-only mortgage loans, wherein the borrower is permitted to pay only the interest for a period of five to ten years. Another type of sub prime mortgage allows borrowers to choose their mortgage payment amount. These "pick a payment" loans are a common feature of Option ARMs , and purposed to keep monthly payments low.