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 documentation requirement where the applicant's assets are not disclosed. ...
The sum of the monthly mortgage payment, hazard insurance, property taxes, and homeowner association fees. Housing expense is sometimes referred to as PITI, standing for principal, ...
A rate lock, plus an option to reduce the rate if market interest rates decline during the lock period. ...
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 ...
The number of days for which any lock or float-down holds. The longer the period, the higher the price to the borrower. ...
An option attached to a mortgage, which allows the borrower to pay only the interest for some period. A mortgage is 'interest only' if the monthly mortgage payment does not include any ...
A borrower, usually refinancing rather than purchasing a home, who allows a lock to expire when interest rates go down in order to lock again at the lower rate. ...
The federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information. Truth in Lending (TIL) is ...
A federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages. ...
Have a question or comment?
We're here to help.