Subprime Home Loan

By: EconomyWatch Content   Date: 27 November 2009

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Although the subprime home loan market emerged in the early 1980s, subprime lending was adopted rapidly only after 1995. While adjustable rate mortgages (ARMs) rose steeply from 2000 onwards, fixed rate loans dipped in 1998 before catching borrower attention again in mid-2000.

 

Subprime home loans are generallyoffered as ARMs in which the interest rate is reset after the expiry of the initial fixed rate period.

Subprime Home Loan Basics

 

A subprime home loan is a mortgage that is typically made available to borrowers with credit ratings lower than 620. The primary feature that distinguishes subprime loans from prime loans is higher upfront costs, which include application, appraisal and other fees associated with mortgage origination, and continuing expenses for subprime loans. The continuing costs in a subprime home loan include:

  • Mortgage insurance payments

  • Principle

  • Interest payments

  • Late fees and fines for delinquent payments

  • Fees such as property taxes and special assessments

 

A subprime home loan has higher interest rates than that on equivalent prime loans. While determining the rates and terms of the loan, lenders consider several factors, such as:

  • Borrower credit history

  • Prepayment risk

  • Credit score

  • Size of down payment

  • Types of delinquencies the borrower has in the recent past 

Subprime Home Loan: Change in Scenario

Subprime mortgages played a crucial part in the financial crisis of 2008. As a result, governments across the world and banking regulators have tightened the standards for mortgage lending.

 

Up until early 2007, lenders used to offer subprime mortgage loans to people having a credit score of less than 620. There were some lenders that offered 100% mortgage loans to individuals with a FICO score of 580.

 

The overall lending criterion in the mortgage industry was impacted during the financial crisis of 2008. Lenders no longer offer 100% finance except in the case of VA loans. Borrowers enjoy the lowest interest rates and favorable terms and conditions if their credit score is over 700. Terms and conditions are less favorable for borrowers having credit scores between 600 and 700. People with credit scores lower than 600 may find it extremely tough to get a mortgage loan.

 

 


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