What Is A Subprime Mortgage?
To understand what is a subprime mortgage, we need to talk about the subprime definition. Subprime means something that is not in the best conditions and, in this scenario, it refers to a subprime borrower; that is someone who has a complicated financial history and provides too much risk for the lender. These borrowers might have filed for bankruptcy in the last 5 years, defaulted two or more times in the recent past, might have a large pending debt and/or a low credit score – or even no established credit history at all. A subprime mortgage is the type of mortgage offered to that profile of borrower.
But so what; is this subprime mortgage just like regular mortgages? Is the subprime mortgage definition made just to separate bad borrowers from good borrowers?
No, to compensate potential losses from those customers who may run into trouble and default, subprime mortgages have a higher interest rate. Those loans are also usually easy on the way in but become burdensome on the way out – they take advantage of the fact that the person has no other option. Most subprime borrowers that manage to fix their situation try a second mortgage later on to try and soften the weight of the later payments.
Subprime mortgages played a big part in the financial crisis of 2008 when hedge funds noticed they could make a lot of money off the buying and selling of those mortgages. They would buy the mortgage from the Lender and manage it with the borrower and everything went well for them until housing prices started to decay lower than the mortgage itself. That took the refinancing possibility off the table – and you couldn’t sell the home either because there was no one buying – which lead to (too) many owners of these mortgage-backed securities trying to collect their insurance against the mortgage defaults, which, in turn, made it financially overwhelming to powerhouse insurance companies that almost went bankrupt, and so was set the scenario for the period that became known as “The Great Recession”.
Popular Mortgage Questions
Popular Mortgage Glossary Terms
A mortgage on which the interest rate is adjustable based on an interest rate index, and the monthly payment adjusts based on a wage and salary index. Dual index mortgages are not written ...
The period over which the interest due the lender is calculated. The interest accrual period may or may not correspond to the payment period. On the annual accrual mortgages in the UK, ...
A second mortgage offered at preferential (subsidized) terms to those who qualify. For example, a labor union may offer members who are first-time home buyers a silent second to finance ...
A mortgage broker who sets a fee for services, in writing, at the outset of the transaction and acts as the borrower's agent in shopping for the best deal. Customers of UMBs pay the ...
The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application. ...
A clause in the note that allows the lender to demand repayment of the balance in full. A demand clause is even better (for the lender) than an acceleration clause. An acceleration clause ...
A multi-lender Web site that offered borrowers the capacity to shop among multiple competing lenders. ...
The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, ...
A term that small lenders sometimes use to distinguish themselves from mortgage brokers. ...
Have a question or comment?
We're here to help.