PRIME VS. SUBPRIME—WHAT’S THE DIFFERENCE?


The concept of subprime and prime mortgage loans is beginning to come back on the lending horizon. For a time, those years during and immediately following the housing debacle of the last decade, subprime loans vanished as did most of the lenders who made them. However, the term “subprime” itself was all too often applied to certain loan programs or borrowers inaccurately. What makes a loan subprime and how does a subprime loan compare to prime?

A loan marked “prime” is typically a mortgage loan issued to a well-qualified borrower. There is no official definition or one that is categorized by mortgage giants Fannie Mae or Freddie Mac, but a prime borrower is one with excellent credit, a sizable down payment and comfortable debt to income ratios. A prime borrower will typically be offered the lowest rates based upon down payment and credit scores yet that can be a moving target from lender to lender.

A subprime loan on the other hand is one that is offered to those with less than perfect credit. And just like a prime loan, there really is no official definition of what a subprime loan is or is not. A subprime loan is one that is offered to someone who cannot qualify for a conventional or government-backed loan, primarily due to credit. Conventional lenders today will usually require a minimum credit score of anywhere from 600 to 620 while certain government-backed programs such as FHA mortgages might be approved with a credit score of 580. For borrowers who have scores lower than either, they might qualify for a subprime loan.

Subprime loans are typically an answer for someone who experienced an external event beyond their control that caused their credit to falter. Those with an extended illness, a divorce or a death in the family can experience something that devastates an otherwise pristine credit profile. A subprime loan is designed as a short-term solution for those who can recover from their situation, reestablish credit and refinance out of the subprime loan into a traditional mortgage with lower rates.

Slowly, subprime loans are making a comeback and those considering subprime loan can expect to have at least a 20 percent down payment and higher interest rates. Subprime loans aren’t the answer for everyone, but in certain situations they do provide a path to better credit and introducing someone to home-ownership.

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