A subprime borrower is an individual with a less-than-perfect credit rating. Lenders will usually charge subprime borrowers a slightly higher interest rate on loans, because they are viewed as having a greater risk of defaulting.
A subprime borrower is someone whose credit history has blemishes on it. Because of this, a subprime borrower may find getting a mortgage to be a bit difficult, but it is still possible. However, subprime borrowers are often subject to higher interest rates.
A subprime borrower has certain characteristics, but these characteristics alone are not the only thing that will determine your interest rate. A lender also looks at each borrower on an individual basis when providing financing. Typical traits of subprime borrowers include:
- A FICO score below 660
- Two or more 30-day delinquencies in the last 12 months or one 60-day delinquency in the past 24 months
- A foreclosure in the last 24 months
- A bankruptcy in the last 60 months
- Debt-to-income ratio of 50 percent or more
- Trouble paying for month-to-month living expenses.
(One note, FICO is a credit scoring system that assigns a numeric value to your credit. The scale is 300 to 850, with 850 being the best possible score. For more information on credit scores, visit the credit score section in the Smart Borrower Center http://www.lendingtree.com/smartborrower/Credit/Credit-scores.aspx)
If a lender decides that you are a subprime borrower, the lender then offers you a subprime loan. Usually this loan has an interest rate that is several points than prime loans. That may not seem like much, but interest greatly increases the cost of your home over the term of a loan.
If you are a subprime borrower, you can get financing. However, the higher interest rate should be encouragement to improve your credit scores so you can avoid being a subprime borrower. To improve your credit score, maintain a good credit history. That means you must pay your debts on time, be sure never to miss a payment, reduce any outstanding debt, and don’t open unnecessary accounts. Even if you do not keep a balance on store credit cards, they can hurt your credit. The inquiry into your credit alone can lower your credit score.
Even though it is possible to get financing as a subprime borrower, it will benefit you financially to improve you credit score first.