Definition of "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”.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Mortgage Questions

Popular Mortgage Glossary Terms

Often referred to as a “second mortgage”, a home equity loan is a type of loan where the borrower disposes to the lender its equity to the home as collateral. To ...

Same as term Bridge Loan: A short-term loan, usually from a bank, that 'bridges' the period between the closing of a home purchase and the closing of a home sale. To qualify for a bridge ...

The amount the borrower is obliged to pay each period, including interest, principal, and mortgage insurance, under the terms of the mortgage contract. Paying less than the scheduled ...

The total cash required of the home buyer/borrower to close the purchase plus loan transaction or the loan transaction on a refinance. Required cash includes the down payment, points and ...

A contribution to a borrower's down payment or settlement costs made by a home seller, as an alternative to a price reduction. ...

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 ...

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 ...

A measure of interest cost on a reverse mortgage. ...

The amount of the original loan remaining to be paid. It is equal to the loan amount less the sum of all prior payments of principal. ...