Subprime Mortgage
A home loan offered to borrowers with poor credit scores, limited income documentation, or other factors that make them higher-risk candidates for traditional mortgages. These loans typically carry higher interest rates and less favorable terms to compensate for increased default risk.
Example
“After the 2008 financial crisis, lenders became much more cautious about offering subprime mortgages to borrowers with credit scores below 620.”
Memory Tip
Subprime is 'sub-par' or below prime quality - think of it as the 'submarine' of mortgages, operating below the surface of good credit.
Why It Matters
Subprime mortgages can provide homeownership opportunities for borrowers who don't qualify for conventional loans, but the higher costs and risks require careful consideration of long-term affordability.
Common Misconception
Subprime mortgages are automatically predatory or designed to harm borrowers.
In Practice
A borrower with a 580 credit score and irregular self-employment income obtains a subprime mortgage at 8% interest when conventional loans are available at 6% for qualified borrowers.
Etymology
Coined in the 1990s combining 'sub' meaning 'below' with 'prime' (the best interest rate), literally meaning loans below the best quality standard.
Common Misspellings
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