Some lenders grant subprime mortgages to borrowers with low credit scores who don't usually qualify for most other home loans. These loans tend to have very high interest rates to protect lenders in the event that the borrower defaults.

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Subprime Mortgage

Related Terms: Subprime Home Loan, Subprime Loan
Subprime mortgages are loans granted to borrowers with low credit scores—usually below 600—who would not be approved for most conventional mortgages. Because of the risk that comes with granting a loan to such borrowers, these loans generally come with high interest rates.
Subprime Mortgage
There are fixed and adjustable rate subprime mortgages available. The ARM is the most common type, sometimes confusing and misleading borrowers with the initial low fixed rates, and following jump to much higher adjustable rates.
 
There are pros and cons to such mortgages:

PROS:
  • It allows people with low credit scores a chance to own a home without going through years of trying to establish a better credit history.
  • Subprime loans can help borrowers fix their credit scores, by using it to pay off other debts and then working towards making timely payments on the mortgage.
CONS:
  • Closing costs and fees are generally higher with subprime loans; the lender tries to get as much money up front as possible because of the increased risk and chances of the borrower defaulting.
  • Even though credit scores aren’t a determining factor for qualifying for the loan, income is. Borrowers must show that they have sufficient income to finance the monthly mortgage payments.

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