Monday, June 13, 2005
What does "subprime" mean when it comes to mortgages?
The term subprime refers to any loan which would not fall into the category of an A or A- ("prime" mortgages). A and A- (A- refers to just outside the scope of the best credit situation) loans are basically for those people who have good or excellent credit, no judgments or liens, and gainful employment for the past two years (not in all situations, but usually). The loans that are pruchased on the secondary market by mortgage giants Fannie Mae & Freddie Mac are generally referred to as A paper. These are usually the best rates available and most often the ones you will see advertised online, in print, and on tv.
However, not everyone fits into the neat little credit situation that A paper requires. These loan are referred to as subprime or B, C, & D paper. This is where people with bruised or bad credit will likely find themselves getting a loan. The terms are generally a little worse and many of the loans do contain prepayment penalties. That doesn't mean that these loans can't be beneficial. For someone who has had extenuating circumstances, a subprime loan can offer them a period of time to stay in their home and repair their credit. This is also the main reason most subprime loans contain short terms. Most subprime loans will be a 2 year ARM with the thinking that a borrower will use those two years to clean up the issues that forced them to obtain a subprime mortgage. Life can really throw some unfortunate situations at people, so sometimes these loans are really necessary after bankruptcy, job loss or medical problems. Certain banks specialize in this type of lending and most reputable brokers or bankers will have a wide range of programs to suit any credit situation and help any borrower that walks through the door. Click the links on the left to find one (shameless plug).
However, not everyone fits into the neat little credit situation that A paper requires. These loan are referred to as subprime or B, C, & D paper. This is where people with bruised or bad credit will likely find themselves getting a loan. The terms are generally a little worse and many of the loans do contain prepayment penalties. That doesn't mean that these loans can't be beneficial. For someone who has had extenuating circumstances, a subprime loan can offer them a period of time to stay in their home and repair their credit. This is also the main reason most subprime loans contain short terms. Most subprime loans will be a 2 year ARM with the thinking that a borrower will use those two years to clean up the issues that forced them to obtain a subprime mortgage. Life can really throw some unfortunate situations at people, so sometimes these loans are really necessary after bankruptcy, job loss or medical problems. Certain banks specialize in this type of lending and most reputable brokers or bankers will have a wide range of programs to suit any credit situation and help any borrower that walks through the door. Click the links on the left to find one (shameless plug).
