If you have a credit score of 620 or lower, you may have to look into a subprime mortgage.

Before we delve deeper into who qualifies as a subprime borrower, let's take a closer look into what a subprime mortgage is, and what it isn't.

How Is A Subprime Mortgage Different?

The biggest difference is that the rates are higher than other home mortgage loans.  What rate you get is based on "risk-based pricing" which is a formula lenders use to determine your rates and the terms of the loan.  Since every subprime loan is different it makes it hard to estimate the rates but you should know that the formula is based mainly on 3 factors:

• Credit score
• The amount you are willing to put as a down payment
• Number of credit delinquencies
• What types of problems and delinquencies you've had in the past. 

Keep in mind that in the lenders eyes, missed mortgage payments are worse than something like a missed car payments, and if you've had a foreclosure you can pretty much forget being approved at all.

Prepayment penalties are common with subprime mortgages.  This is a penalty charged to the borrower if they pay off the loan early.  It sounds backwards, but they are trying to guard against borrowers building up credit with the high-rate subprime mortgage and then refinancing at a much lower rate when their credit profile is strong enough to do so.

Many people say that these fees contribute to more foreclosure's, but subprime lenders just argue the reverse point that they are only able to afford to do these loans with reasonable rates because of those fees.

Finding A Responsible Lender

When searching for a subprime mortgage, you have to be careful to find a non-predatory lender.  Lender's know that when someone is searching for a subprime mortgage, generally they are more desperate, and possibly naive enough to not fight crazy interest rates and fee's.  This is another reason why you need to know your credit score and history BEFORE going into talk to a lender.  Predatory lenders often tell borrowers their credit profile is worse than it is.

Another way these lenders prey on consumers is by targeting minorities and inexperienced borrowers in general.  They may let you state an income above what they know to be correct, as well as overvalue the new property.  Constant refinancing is also usually pushed on the consumer touting lower interest rates while the hefty refinancing fees go right in the lenders pocket.

Many of these lenders aren't even interested if the borrower can repay the loan.  They may set up the loan in a way that they know the consumer will be unable to keep up with the payments just so they can foreclose on the home and resell it outright when the consumer defaults.  In a regular mortgage, foreclosing is bad for the bank, but with a predatory lender, they will try to get a large down payment, rake in high interest rates for a couple years, and continually receive closing fees when they push refinancing so they can end up way ahead.

Be sure to shop around for your mortgage, look closely at the terms, check the lender out online, and I would even advise showing the closing documents to a lawyer before signing.

Qualifying For A Subprime Mortgage

Credit scores can range anywhere from 300-900 with most borrowers in the 600-700 range and as we mentioned earlier, if your score drops below 620, you are in the subprime category.  Many things can cause your credit score go down including:

• Being late paying bills.
• Having a lot of outstanding debt.
• Too many accounts open. This is usually credit cards, but can extend to other loans.
• Closing too many accounts.  It's actually bad to close too many credit cards at one time,  especially if there is still a balance on them.  Our advice would be to just cut them up.
• Not having very much credit history
• Fines associated with bills, or even something as small as a late book at the public library or a parking ticket!
• Bankruptcy or foreclosure

Keep in mind that you will rarely see the term "subprime" associated with a loan.  They will usually either not describe it as anything out of the ordinary, or possibly using something like "non-prime".

Now that we've sufficiently scared you, if you go in with the right knowledge you can successfully buy a home with a subprime mortgage and not get yourself in a bad situation. Hopefully if you do have a low credit score, this article has helped.  Don't forget to check out a lot of different lenders. Subprime mortgage rates are all over the map and dealing with multiple lenders will help educate you as well as aid in picking the right lender and terms.