Subprime Mortgage

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Subprime Mortgage

A subprime mortgage is a home loan made to a borrower with a below‑average credit history who would not qualify for a prime, or conventional, mortgage. Lenders charge higher interest rates on subprime loans to compensate for increased default risk. These loans are often adjustable‑rate mortgages (ARMs), which can increase borrowers’ monthly payments over time.

What makes a loan “subprime”?

  • “Subprime” refers to the borrower’s credit profile, not the interest rate itself.
  • Typical credit score thresholds vary by lender, but FICO scores below roughly 600–640 have historically been treated as subprime. The Consumer Financial Protection Bureau (CFPB) classifies scores between 580 and 619 as subprime.
  • Factors that influence the rate offered include credit score, down payment size, number and recency of late payments, and types of delinquencies on the credit report.

How subprime differs from prime mortgages

  • Applicants are often graded (A–F). Prime loans go to higher‑rated (A/B) borrowers; lower‑rated borrowers receive subprime offers if any.
  • Subprime loans carry higher interest rates and often stricter or more costly terms (e.g., higher fees, prepayment penalties).
  • Lenders’ underwriting standards and score cutoffs vary, so shopping multiple lenders can sometimes reduce cost.

Who offers subprime mortgages

  • Any lender can make a subprime loan, but some specialize in lending to higher‑risk borrowers.
  • Specialized lenders can expand access to credit for people who otherwise would be turned down, but the higher long‑term cost can be significant.

Drawbacks and risks

  • Higher monthly payments and more interest paid over the life of the loan.
  • Adjustable rates or “teaser” rates can reset upward, causing payment shock and raising default risk.
  • Systemic risk: widespread issuing of poor‑quality subprime loans contributed to the 2008–09 financial crisis when many borrowers defaulted and housing prices fell.

Role in the 2008 housing market crash

  • Subprime lending—including no‑doc or low‑documentation loans often labeled “NINJA” (no income, no job, no assets)—expanded rapidly prior to 2007–2008.
  • Many loans required little or no down payment, used introductory low rates that later reset, and relied on rising home prices.
  • When home prices declined, many borrowers became “underwater” and defaulted, amplifying losses across lenders, mortgage‑backed securities, and the broader financial system.
  • The crisis was the result of multiple interacting failures: irresponsible underwriting, securitization practices, rating agency assessments, and other market incentives—not a single cause.

COVID‑19 mortgage relief

  • Pandemic relief measures provided temporary protections for homeowners facing financial hardship:
  • The CARES Act limited foreclosures on federally backed loans for a period and allowed forbearance requests of up to 180 days (with possible extensions) for those affected by COVID‑19.
  • The American Rescue Plan provided additional housing and rental assistance funding.
  • Homeowners who need help should contact their loan servicer and explore federal, state, and local assistance programs (for example, resources compiled by housing advocacy groups).

Practical advice for borrowers

  • If possible, improve your credit score before applying—waiting can lead to much better rates.
  • Shop multiple lenders and get prequalified to compare terms.
  • Consider fixed‑rate mortgages to avoid payment shocks from ARMs.
  • Provide complete documentation and work with reputable lenders; avoid loans with unclear or overly complex terms.
  • Seek counseling from HUD‑approved housing counselors or nonprofit organizations if you have trouble qualifying.

Key takeaways

  • Subprime mortgages target borrowers with weaker credit and therefore carry higher rates and often less favorable terms.
  • Credit score thresholds for subprime vary, but scores below roughly 600–640 are commonly considered subprime; the CFPB identifies 580–619 as subprime.
  • Subprime lending increases access to homeownership but raises default and long‑term cost risks for borrowers.
  • Poor underwriting and widespread subprime lending were major contributors to the 2008 financial crisis.
  • Improving credit, comparing lenders, and understanding loan terms can reduce the cost and risks of borrowing.

Selected sources

  • FDIC — Crisis and Response: An FDIC History, 2008–2013
  • Consumer Financial Protection Bureau — Borrower Risk Profiles
  • MyFICO — Prime vs. Subprime Loans: How Are They Different?
  • U.S. Congress — CARES Act; American Rescue Plan Act