What Are the Risks of a Subprime Mortgage?

A subprime mortgage is one in which the lender determines through a formula that a borrower would not be eligible for a traditional loan based on credit criteria, income criteria and other non-specific criteria. The risks of a subprime mortgage exist not only for the lender, but for the borrower as well. Here are some of the risks associated with subprime mortgage lending and borrowing.

Subprime Mortgage Borrowing

Lenders who are willing to loan to a consumer with a less than perfect credit rating typically increase their rates significantly over a traditional mortgage loan. For the borrower, this means that the interest rate could be as much as twice as high as the rate paid by a borrower with perfect credit.

Borrowing from a subprime lender can also result in programs that are not always ideal for the borrower. Interest rates that are fixed are much higher and adjustable rate programs which may seem very attractive often have hidden charges, significant increases on a regular basis and often very high pre-payment penalties.

Subprime Mortgage Lending

Lenders who are in the business of lending to those with less than perfect credit are willing to take more significant risks than those who lend to those with perfect credit. The concept behind subprime mortgage lending is that those borrowers who do not meet the guidelines for traditional loans can still provide a lucrative return on investment for lenders.

This was based not only on a borrower's willingness to pay a higher rate, and that home pricing would remain stable. During the 1990's many home mortgages were funded through subprime mortgage loans, some with rates as high as 2% over the prime. Upwards of 20% of all mortgage loans originated in 2006 were considered subprime mortgage loans.

When the Bottom Falls Out

What lenders (and many borrowers) did not anticipate was the number of loans that were defaulted upon. Lenders were seeing larger than anticipated defaults as a result of home prices decreasing. Many subprime mortgage borrowers suffered losses in home values and had mortgage balances that exceeded the value of their home.

Getting Legal Help

Subprime mortgage lenders often did not advise borrowers of the changes that their mortgages would undergo (rate increases, prepayment penalties). Borrowers with subprime mortgage loans are encouraged to contact an attorney for advice if they are struggling to meet monthly payments. A qualified attorney may be able to help save your home.