What is a subprime mortgage loan? Many consumers have heard the term subprime loan but many are unfamiliar with what the definition of a subprime mortgage loan actually is. In mortgage financing borrowers with bad credit, hard to prove income or borrowers with late mortgage payments often fall into the subprime mortgage loan category.
There are even many borrowers who have good credit who need to obtain subprime loans due to situations such as they can't document where there down payment and/or closing cost money is coming from, they do not have enough money in reserves to qualify them for a conforming loan, they had a bankruptcy within the past 24 months (even though they might already have a credit score that is back up over 700), etc... There are many reasons why people go with a subprime loan instead of a conventional loan and subprime loans are not just for people with bad credit.
A Subprime mortgage loan can have alternatives, such as an FHA mortgage. FHA mortgages are not FICO score driven.
Originally, a subprime loan meant a loan which has a credit rating below the minimum credit standards of Fannie Mae and Freddie Mac. The proverbial "line in the sand" used to be anything below a 620 fico credit score was generally deemed a subprime loan.
Although subprime loans have typically higher interest rates, the loans can be beneficial if it can be used to payoff higher interest credit card debt, improving your monthly cash flow and possibly improving your credit scores.
Loans fall into three classifications. Prime, Alt-a and subprime. Subprime loans have the lowest credit quality and usually pay a higher interest rate.