Mortgage Subprime Vs. Prime

A mortgage is a debt or lien on a house.

The main demarcation between a subprime and prime mortgage is the credit score requirements for the borrower. In most cases, a borrower with a credit score below 580 can only qualify for a subprime mortgage while borrowers with credit scores above 580 can qualify for a prime mortgage.

Significance

Subprime mortgages carry more of a risk for lenders, therefore, the interest rate charged to the borrower is significantly higher than a prime mortgage.

Function

Subprime mortgages give borrowers with lower credit scores the opportunity to own a home and begin to work on building their credit score up enough to qualify for a prime mortgage refinance in a few years.

Types

Both subprime and prime mortgages offer the same basic loan terms, with length of the debt ranging from 10 to 40 years with fixed and variable rate options.

Considerations

It is in the borrower's best interest to have the highest credit score possible when applying for a mortgage debt. To help avoid a subprime mortgage rate, the borrower may want to attend credit counseling prior to application for a new mortgage.

Warning

Many subprime lenders are known for predatory lending. They are well aware that the borrower has limited options due to his credit score and will raise the rates accordingly. The borrower should shop around to try to procure the lowest possible rate, even for a subprime mortgage.

References

• Investopedia: Subprime Mortgage
• Mortgage Calculator: Mortgage Types