• January 29, 2023

A Complete Guide: What Is A Subprime Mortgage Loan?

 A Complete Guide: What Is A Subprime Mortgage Loan?

mortgage loan

If a person dreams of becoming a homeowner, but bad credit score is getting in their way o, a subprime mortgage loan can be a good option in making those dreams come true. These are debt instruments that individuals with low credit scores can obtain. Although these have higher interest rates than conventional loans, they provide financial rescue to those who need funding to purchase the property they desire. 

Whether a person is looking for a new housing loan or a balance transfer Home Loan, here is a complete guide to the route of a subprime mortgage.

What is a Subprime Mortgage Loan?

A subprime mortgage, also known as a non-prime mortgage, is a housing loan option specially designed for high-riskay potentially borrowers. While most lending institutions offer Home Loans to applicants with high credit ratings, Subprime Mortgage Loans are designed for borrowers with bad credit ratings. Finance companies charge higher interest rates than conventional loans to cover their risk and compensate for the potential loss. These are Aadjustable-Rrate Mortgage (ARM) loans, which means interest rates increase at different points in time.

Who is eligible for Subprime Mortgage Loans?

While prime borrowers with good credit and vital financial records are eligible for prime loans, lenders provide Subprime Mortgage Loans to individuals with bad credit ratings at higher interest rates. A subprime borrower is a loan applicant who:

  • Delayed at least two EMI payments by over 30 days in the last year, or at least one EMI payment by 60 days in previous two years
  • Had a foreclosure, judgment, charge-off, or repossession in last two years
  • Filed for bankruptcy in last five years
  • Has a Debt-to-Income (DTI) ratio of over 50%

Types of Subprime Mortgage Loans

A subprime mortgage loan can be of different types, including the following:

  • Fixed rate mortgage: This loan type sets the interest rate for the duration of the mortgage loan, and EMI payments remain the same throughout the tenure. However, unlike a conventional loan that lasts for 15-20 years, Subprime Mortgage Loans with fixed rates last longer, giving borrowers more time to repay the loan conveniently
  1. ARM Loans Rather than having a fixed interest rate that remains the same throughout the term, a subprime loan with ARM offers a low introductory rate that keeps fluctuating according to the market. For instance, borrowers pay the introductory interest rate for the first few years, which then converts into a floating interest rate that changes according to the market rate
  2. Interest-only mortgage: In an interest-only mortgage loan, the borrower pays only the interest cost for the first few years of the loan term and repays the principal amount later
  3. Dignity mortgage: In this type of subprime mortgage loan, the borrower agrees to pay a higher interest rate for the first few years of the loan tenure. If they pay all EMIs on time during this period, the lending institution may reduce the interest rate to creditworthy customers 

Advantages of obtaining a subprime mortgage loan

Although the interest rates are higher than conventional loans, Subprime Mortgage Loans offer several benefits to borrowers. These include the following:

  • A subprime mortgage loan helps low-credit-score individuals get the required funding to own their dream house
  • With regular payments, borrowers can improve their credit score over time and opt for a balance transfer Home Loan at a lower interest rate
  • Subprime Mortgage Loans have longer tenures, making repayment easier

Times when subprime mortgage is a good choice

Although subprime mortgage comes at a higher interest rate, here are a few scenarios when it might be a good choice for borrowers:

  • When an individual finds a dream home that they don’t want to lose because they don’t have funds
  • While the person is trying to rebuild credit and they are confident of timely repayments
  • When a borrower plans to stay in the home for a long time and anticipates refinancing
  • When an individual can afford a bigger down payment with an anticipated boost in income

If the credit report is short or inadequate, a subprime home or land mortgage loan can be the best opportunity to get the house of dreams. Before applying for one, research for favourable loan terms, calculate the loan cost carefully, and make sure you can meet the monthly insallments. Opt for a balance transfer Home Loan later to revise the interest rates and reduce costs.

Robin Williams

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