Subprime Mortgage

A subprime mortgage is a mortgage which is tailored to those who are labelled as high risk borrowers by the banks and building societies that lend out home or business mortgages. These financial institutions define a high risk borrower as someone who has a bad credit rating or insufficient income. People can develop a bad credit rating due to a history of not meeting their bill payments and other financial requirements. These defaults and late payments are stored onto a database which financial institutions can access when they are giving someone a loan. This is how banks and building societies are able to assess how stable or risky their potential customers are.

You may also be characterised as a high risk borrower if you do not have a sufficient stream of income to allow you to confidently and consistently meet your monthly mortgage payments. So if you are looking to buy a house which has a monthly mortgage cost that you can only just afford, you would be characterised as a high risk borrower due to likelihood of you defaulting on your monthly payments. To avoid this you need have enough income for your lender to believe that it is unlikely that you will not be able to pay every month.

Some people try to overcome this problem by lying on their mortgage application form and stating that their income is a lot higher than it really is. This is ultimately a very bad idea because most of the time you are caught out after your lender performs a series of credit checks on you prior to them issuing you a loan. If you do manage to convince your lender that your income is higher than it actually is, you are taking a big risk yourself. This is because you are entering a mortgage which you may not have the money to pay for. This means you could potentially default on your own payments which would at the very least cause you to get a very bad credit rating and at most cause you to lose your own property.

Conditions on Mortgages

If you are someone with this type of profile, either a bad credit rating or insufficient income or even both, you will be issued a subprime mortgage. As an investment, financial institutions want to stay away from high risk borrowers due to the possibility of them not meeting their payments. To overcome this they are given a subprime mortgage which has higher interest rates and stricter terms and conditions than a mortgage for those who have a good credit rating and sufficient income.

By hiking up their interest rates and putting stricter conditions on these mortgages, financial institutions make up for the potential losses that they might incur by taking up a high risk borrower. So if a borrower with a subprime mortgage happens to default on their monthly payments, the financial institution will not lose as much money as they would have done without these harsh measures attached to the loan. The use of a subprime mortgage is usually the only way that financial institutions will give out loans to high risk borrowers.

Good or Bad

Depending on how you look at it, giving out subprime mortgages can be a bad thing or a good thing. On one side of the coin the mass lending of subprime mortgages can lead to potentially catastrophic consequences. This is most recently shown in the 2000's subprime mortgage crisis which is widely believed to have been the first indication of the 2000's financial crisis. In short the principle behind the problem with a subprime mortgage is that if a company takes a lot of these high risk investments and they all end badly, that company can lose a lot of money and go under. This is obviously bad for the economy at large so many people believe that subprime mortgages are reckless and irresponsible.

On the other hand by allowing financial institutions to lend out subprime mortgages they are enabling people with bad credit ratings to bring their credit back up which is seen as good. The nature of the credit rating systems means that those with bad credit are often unable to ever get a good loan; subprime mortgages can be very useful in tackling this problem. Whichever side of the argument you are on, as a consumer getting a subprime mortgage is not ideal due to the high interest rates that are attached. However if you are stuck in a situation where you are left with a bad credit rating or insufficient income to get the property you want, a subprime mortgage could be for you. If you decide to apply for one you need to be sure that you really can make the monthly payments and as a result you should be responsible with your money.