- According to Bankrate.com, mortgages are considered subprime when they are awarded to someone with a credit score lower than 620. Credit scores can range from 300 to 850, with most people falling somewhere in the 600 to 800 range. Mara Lee of NPR says that scores below 620 are usually the result of a history of paying debts late or not paying debts at all. According to the credit reporting firm Experian, 20 percent of U.S. consumers have credit scores below 620.
- Subprime borrowers are considered high-risk; therefore, subprime loans get interest rates that are at least 2 percent higher than rates offered to good credit applicants. The final rate will depend on how low the credit score is, the size of the down payment and the type of late or defaulted credit from the borrower's past.
- Subprime borrowers are typically offered adjustable rate mortgages or ARMs, which are considered more risky. ARMs have rates that often start low, but can change based on interest rates and federal money indexes. University of Pennsylvania business real estate professor Susan Wachtler says that 80 percent of subprime loans are ARMs. The initial ARM period is often cut shorter with subprime loans as well: two to three years, compared with five or more for prime borrowers. Payments can increase by hundreds of dollars as the rate climbs.
- According to Bankrate, subprime loans are more likely to have prepayment penalties and balloon payments, two things that are associated with a higher foreclosure rate. Prepayment penalties result in a fee for paying off the loan early or more quickly due to selling the home, refinancing or paying more per month than required. Balloon payments set a fixed period with normal payments that do not cover the entire loan balance; at the end of the period, the full balance is due, which usually requires the homeowner to sell or refinance the loan. Subprime loans can be difficult to manage, because the borrowers tend to have credit problems.
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