Difference Between Subprime & Prime Mortgage Loans
Most homebuyers qualify for one of two mortgage loans: Prime, also known as conventional, and subprime. What loan they get depends mostly on a credit score, as lenders today rely on this number more than ever.
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Who Qualifies
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Misusing credit often leads to a subprime loan. Borrowers with good credit histories will qualify for prime mortgages. Borrowers with bad credit scores--and the history of missed payments and high debt that comes with it--will usually qualify for subprime loans.
Credit Score Is King
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Managing money wisely usually leads to prime loans. When determining which borrowers qualify for prime loans, lenders rely on each borrower's credit score. This number, generated by the nation's three credit bureaus, represents the way borrowers have managed their money. Low credit scores usually lead to subprime loans.
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Interest Rates
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Interest rates are higher on subprime home loans. Prime mortgages come with lower interest rates than do subprime loans. Lenders consider borrowers with shaky credit histories risky. The higher interest rates provide financial protection to lenders.
Subprime Opportunities Down
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Lenders are giving away fewer dollars to subprime borrowers. Many mortgage lenders as early as 2010 had stopped offering subprime loans. It has become more of a challenge for borrowers with bad credit to obtain a mortgage loan. The chief economist of the National Association of Home Builders says that mortgage lenders are becoming stingier with their money, reported the New Jersey Record.
More Options
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Mortgage companies offer more opportunities to prime borrowers. Borrowers applying for prime or conventional loans generally have more options than do those applying for subprime loans. Prime borrowers may take advantage of adjustable-rate, low-down-payment or no-documentation loans.
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References
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