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
Proliferation in the number of loan, borrower, property, and transaction characteristics used by lenders to set mortgage prices and underwriting requirements. Nichification is unique to ...
A derogatory term for lender fees that are expressed in dollars rather than as a percent of the loan amount. ...
The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A mortgage interest rate is a rate on a loan secured by a specific property. ...
The interest rate or rates and upfront fees paid to the lender and mortgage broker. Some upfront charges are expressed as a percent of the loan, and some are expressed in dollars. The ...
The longest period for which the lender will lock the rate and points on any program. On most programs, the longest lock period is 90 days; some go to 120 days and a few to 180 days. It ...
The most recently published value of the index used to adjust the interest rate on an indexed ARM. ...
After reaching a certain annual income, you might be interested in finding the definition of a jumbo mortgage. What is a jumbo loan? It is something like a mortgage with ...
A mortgage loan for 125% of property value. Since such loans are only partly secured, they have many of the characteristics of unsecured loans, including relatively high interest rates. ...
The period you must retain a mortgage in order for it to be profitable to pay points to reduce the rate. ...
Have a question or comment?
We're here to help.