Updated January 2018
What is a subprime mortgage?
A subprime mortgage is made for individuals who may have poor credit or no credit whatsoever. With a conventional loan, a lender with a poor credit history might not qualify or be approved. A subprime program removes this challenge for the borrower. However, subprimes mortgages tend to have slightly higher interest rates than a normal prime lending rate. Also, there are usually higher down and closing costs due to the added risk of a low credit score borrower.
Types of Subprime Loans
Subprime mortgages have many different mortgage structure available. The most common Subprime mortgage is an adjustable rate mortgage. ARMs allow the borrower to choose how much they would like to pay each month. This can be useful if you are unable to make the payments in full at the beginning of your loan term. However, lower payments will result in a higher principal. So putting off paying your loan can hurt you in this program.
A Fixed-Interest Mortgage is another type of subprime loan. These loans usually have 40-50 year loan terms which are longer than a standard loan period. This lowers the monthly payments making more manageable payment for the borrower, however, this is often coupled with higher interest rates.
Interest-Only mortgages allow for the payment of the principle to be postponed. This means that the borrower is only paying interest on their loan and the payments to the principle are not required for the first term of the loan.
The newest type of subprime loan is a Dignity Mortgage, this program has a down payment of 10 percent but pays a higher interest rate for a set period of about 5 years. If all the payments are made on time then the extra interest will go towards the balance of the mortgage. The interest rates are then lowered to their prime rates.
While the rates are not the most competitive with subprime loans; if you have no or bad credit a subprime loan can help you get into your home. Depending on your situation a subprime loan may be a good option for you. Do your homework and check out your options.
Subprime mortgage information, rates, lenders, and guidelines. See subprime lenders for 2018 here.