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subprime mortgage is a type of high-risk loan offered to borrowers with
poor credit histories (typically FICO scores below 620–670) who do not
qualify for conventional prime loans
. These loans feature higher
interest rates, fees, and stricter terms to offset the increased risk of
default, often involving adjustable-rate mortgages (ARMs) that can see
payments rise significantly over time.Key Characteristics of Subprime Mortgages:
- High Interest Rates & Fees: Due to the high-risk nature, lenders charge higher interest rates than conventional loans to compensate for the risk of default.
- Borrower Profile: Typically aimed at individuals with low credit scores, high debt-to-income ratios, previous bankruptcies, or foreclosures.
- Adjustable Rates: Many are ARMs, featuring "teaser" rates that later adjust upward.
- Higher Down Payments: Subprime loans may require significantly higher down payments, sometimes up to 35%.
- Risk of Default: Because of higher payments, these loans carry a greater risk of foreclosure.
Background and Regulation:
Subprime mortgages were a primary factor in the 2007–2010 financial crisis. While they still exist for borrowers with credit challenges, they are now subject to stricter regulations by the Consumer Financial Protection Bureau (CFPB).
Subprime mortgages were a primary factor in the 2007–2010 financial crisis. While they still exist for borrowers with credit challenges, they are now subject to stricter regulations by the Consumer Financial Protection Bureau (CFPB).
Alternatives:
Borrowers are often encouraged to seek FHA, VA, or USDA loans, which are government-backed and often offer better terms for those with less-than-perfect credit.
Borrowers are often encouraged to seek FHA, VA, or USDA loans, which are government-backed and often offer better terms for those with less-than-perfect credit.
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