Sub Prime Mortgages: The Basics

2007-03-08 10:33:40

( Financial )



Simply put, sub prime mortgages are mortgages with higher interest rates due to increased credit risk on the part of the mortgage lenders. Sub prime mortgages are different from self certified mortgages or prime mortgages which are offered for people with excellent credit ratings and has demonstrated their ability to pay off their loans.

Sub prime mortgages are for potential homeowners who do not meet one of these general criteria. However, your credit score and your capability to pay your loan are not the only factors mortgage lenders look at. You can be given sub prime mortgages even if you have an excellent credit score. Mortgage lenders base their decisions on other factors such as loan-to-value ratio and even the characteristics of the property you wish to purchase. If any of these factors pose a greater risk to the mortgage lender, there is a good chance you will be given a sub prime mortgage.

People with sub prime mortgages have higher loan-to-value ratios compared to people with prime mortgages. This shows that people with sub prime mortgages have more difficulty in paying compared to those with prime mortgages. Your credit score is a very big factor when determining which type of mortgage you are going to have. However, it would also depend on the amount of your down payment. People without excellent credit ratings have been given prime mortgages when the have a big down payment. Predictably, sub prime mortgages have significantly higher interest rates than prime mortgages.

Sub prime mortgage holders may have been denied financing several years ago. However, mortgage lenders can now impose higher interest rates to people who pose a higher credit risk. This includes people with bad credit histories and people who are just starting out. Sub prime mortgage is one of the results of the evolution of credit markets. This allows more flexibility for people with spotty credit histories to own property.


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