A subprime mortgage is a mortgage granted to a subprime borrower (an individual with less-than-perfect credit). The interest rate charged is higher than the prime rate obtainable by those with a good credit rating.
A subprime mortgage is available to potential borrowers who have low credit scores. They are referred to as subprime borrowers. Subprime borrowers often have difficulty obtaining home loans. A subprime mortgage allows such borrowers to obtain financing for a home, but it carries a higher interest rate.
The following factors help determine whether a borrower is offered a subprime mortgage:
• a FICO score below 660 • two or more 30-day delinquencies in the last 12 months • even one 60-day delinquency in the past 24 months • a foreclosure in the last 24 months • a bankruptcy in the last 60 months • a debt-to-income ratio of 50 percent or more • trouble paying for month-to-month living expenses.
Any of these factors can cause a potential borrower to be subject to a subprime mortgage. That does not mean, however, that you will have to get a subprime mortgage just because one of the above characteristics describes you does. Lenders look at each borrower on an individual basis and use the above as guidelines, not set rules.
The higher interest on a subprime mortgage can add up over the lifetime of a loan. A higher interest rate can also translate into higher monthly payments. In order to avoid a subprime mortgage, it is important to have a good credit score. To improve your credit score you must maintain a good credit history. To do so, concentrate on paying your debts on time. Don’t miss a payment, even if that means you can only make the minimum payment each month. It’s also important to try to reduce any outstanding debt. Don’t let credit card debt hang over your head -- work to pay it off as soon as possible. And, don’t open any unnecessary accounts. Almost every transaction begins at a retailer with the question, “Would you like to save 10 percent today?” As tempting as it is to get a quick discount, this can cause long-term damage to your credit score. Although a subprime mortgage is not ideal, sometimes it is the only option, available to borrowers with poor credit. Before you request a mortgage, try to improve your credit score so you can get the best interest rate possible.