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.
