How to Know if a Mortgage is Subprime

The subprime mortgage was created as a way to allow the risky borrower a chance to own a home. Risky borrowers are those whose credits scores are low and whose credit histories are unfavorable. For these people, who were previously unable to own a home, subprime mortgages answered a prayer. Here's a way to know if a mortgage is subprime.

Difficulty: Easy

Instructions

1. The interest rate will be unconventional. Subprime mortgages are known for their high interest rates, which lenders use to offset the risk involved. The interest rates are often mixed, with the first two to three years at a fixed rate and the subsequent years adjusted to the fully indexed rate.

2. The down payment will be low or not required. Subprime lenders often allow borrowers to mortgage 90 percent or more of the home's value. One hundred percent loans also are frequent with subprime lenders.

3. Look for ads that specifically target borrowers with low credit scores and questionable credit histories. These are the ideal candidates for a subprime mortgage. Some lenders will even advertise their loans as a way to own a home and repair your credit in the process.

Tips & Warnings

• Because of the high, variable interest rate, a subprime mortgage should be used only as a short term loan. Borrowers should repair their credit and refinance before the fixed rate period is up.
• Carefully review the fine print. Most subprime loan contracts contain a prepayment penalty that usually expires after the fixed rate is over. Read your contracts carefully before signing: you can catch it and renegotiate for a fairer term for the penalty or none at all.
• Shop around for your subprime loan. Some lenders are known to include high upfront fees in their contracts. Shop around for reduced fees or none at all.