Prime Mortgage vs. Subprime Mortgage

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Difference between Prime Mortgage and Subprime Mortgage

Prime mortgage and sub-prime mortgages are two terms that often comes to mind when the talk of home loans come to play. Many people understand what mortgage is, but what makes prime mortgage different from sub-prime mortgage? In a nutshell, the difference lies in the borrower’s credit score requirements. If a borrower’s credit score falls below 580, they qualify for a sub-prime mortgage, whereas a borrower’s credit score of above 580 would entitle them to a prime mortgage.

Qualifications

Credit score of a borrower is crucial to the approval of one’s loans. In fact, it is the main aspect in the set of criteria that lenders rely on to determine approval of loans. Credit scores are obtained from the country’s three credit bureaus. It is a way for lenders to tell the borrower’s financial responsibility and behavior. Prime mortgages are awarded to borrowers whose credit scores reflect on-time and complete payments. However, a history that reveals late and missed payments results in a credit score that’s low, which means the borrower will only be granted a sub-prime mortgage.

Interest Rates

Interest is a way for lenders to protect themselves and the money they lend to borrowers. Because borrowers granted with lower prime mortgages have reassuring credit scores, their loans come with lower interest rates. This means there is trust that exists due to how they have handled their financial responsibilities in the past. However, people with low credit scores will be approved of sub-prime loans which have higher interest rates. This is because lenders need to build a wall of protection around the money they put out. 

Loan Terms

Although interest rates differ between prime and sub-prime mortgages, it must be noted that both these types of mortgages essentially have similar loan terms. The length of the debt can range anywhere from 10 to 40 years. There are variable as well as fixed options for both prime and sub-prime borrowers.

Risks and Implications

While there are not many risks involved in prime mortgage, there are many things sub-prime borrowers must consider. Many sub-prime borrowers are advised to go into credit counseling to reflect on whether they are prepared for the high interest rates and other risks that come along with their loan. Sub-prime lenders are considered predatory because they earn more from the interest rates they demand from people who are already suffering from debts and bad credit scores. Early this year, there was an apparent rise in lenders who canceled their sub-prime loan offerings.  It seems that people with bad credit scores will find it more challenging to apply and be approved for housing loans.

Summary

The approval of both prime and sub-prime mortgage loan applications is reliant upon a borrower’s credit score.

  • Prime mortgage is offered to borrowers with good credit score (580 above) and sub-prime mortgage is an option for borrowers with poor credit scores (580 below)
  • Interest rates of sub-prime loans are higher compared to that of prime loans.
  • Both types of mortgages have similar terms and lengths of debts and both can be fixed or varying.  
Which type of mortgage is damaging?
  • Prime Mortgage
  • Subprime Mortgage
 
 

Discuss It: comments 2

  • Guest
  • james wrote on December 2010

Borrowers with good credit histories will qualify for prime mortgages. Borrowers with bad credit scores--and the history of missed payments and high debt that comes with it--will usually qualify for subprime loans.

  • Guest
  • Payday Loans wrote on February 2013

The basic thing that lies behind the Prime mortgage and Sub-Prime Mortgage is the borrower’s credit score. Well it becomes quite indigenous that the borrower should be quite aware of his credit scores that plays a vital role while applying or between the tenure of loan.

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