Loading the player...

What is a 'Subprime Mortgage'

A subprime mortgage is a type of mortgage that is normally issued by a lending institution to borrowers with low credit ratings. As a result of the borrower's lower credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage in order to compensate themselves for carrying more risk.

BREAKING DOWN 'Subprime Mortgage'

The term "subprime" is thought to refer to the interest rate attached to a mortgage. If a mortgage is considered subprime, people usually assume that it is denoting that the interest rate is high. However, subprime actually refers to the credit score of the individual taking out the mortgage. The size of the interest rate associated with a subprime mortgage is dependent on four factors, in order of importance: credit score, the size of the down payment, the number of late payment delinquencies on a borrower's credit score and the types of the delinquencies.

Therefore, borrowers with credit ratings below 600, for example, will often be stuck with subprime mortgages and higher interest rates to go along with those mortgages. Additionally, making late bill payments or declaring personal bankruptcy could very well land borrowers in a situation in which they can only qualify for a subprime mortgage. Thus, it is often useful for people with low credit scores to wait for a period of time and build up their scores before applying for mortgages, to ensure they are eligible for a conventional mortgage.

An Example of the Rise of Subprime Mortgages

For those who remember, the 2008 market crash and housing crisis was due in large part to wide-spread defaulting on subprime mortgages. Essentially, many borrowers were given what has been come to be called NINJA loans, which are mortgages given to people with no income, no job and no assets. Often times, these mortgages were issued with no down payment. Then, these borrowers found themselves underwater in a declining housing market, with their home values lower than the mortgage they owed. Many of these NINJA mortgages defaulted because the interest rates associated with the loans were called "teaser rates," which were variable interest rates that started low and ballooned over time, making it very hard to pay down the principle of the mortgage.

However, potential subprime mortgages are again on the rise. As of June 2015, Wells Fargo, Bank of America, and other financial institutions reported that they would begin offering mortgages to individuals who had credit ratings in the low 600s.

RELATED TERMS
  1. Subprime Borrower

    A person who is considered a higher-than-normal credit risk. ...
  2. ABX index

    A financial benchmark that measures the overall value of mortgages ...
  3. Subprime Market

    The market for lenders and borrowers of subprime credit, a credit ...
  4. Subprime Loan

    A type of loan that is offered at a rate above prime to individuals ...
  5. Mortgage Rate

    The rate of interest charged on a mortgage. Mortgage rates are ...
  6. Subprime Rates

    Interest rates charged to subprime borrowers, such as on loans ...
Related Articles
  1. Personal Finance

    What is a Subprime Mortgage?

    Subprime mortgages are offered to borrowers with low credit ratings, usually 600 or below.
  2. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
  3. Investing

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  4. Investing

    Subprime Lending: Helping Hand or Underhanded?

    These loans can spell disaster for borrowers, but that doesn't mean they should be condemned.
  5. Small Business

    The Rise And Demise Of New Century Financial

    A case study in how poor planning toppled a subprime mortgage giant.
  6. Investing

    Who Is To Blame For The Subprime Crisis?

    From lenders to buyers to hedge funds, it appears everyone has blood on their hands.
  7. Insights

    The Fall of the Market in the Fall of 2008

    How did America's strong economy tumble so quickly? Find out here.
  8. Insights

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  9. Personal Finance

    Conventional Mortgage

    A conventional mortgage is any type of homebuyer's load that is not offered or secured by a government entity but rather available through a private lender.
  10. Personal Finance

    Rate Freeze To Cool Mortgage Meltdown

    The U.S. government is offering help to subprime borrowers. Is this a cure or a curse?
RELATED FAQS
  1. How much risk is associated with subprime mortgages?

    Discover the risks associated with subprime mortgages. Find out whether taking out a subprime mortgage on your home is really ... Read Answer >>
  2. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  3. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
Trading Center