Credit Scores

• Subprime mortgages have traditionally been offered to consumers whose credit ratings are deemed poorer than the average consumer. Scores range from 550 to 850, with 550 being poor and 850 being excellent. According to Edmunds.com, "A credit score of less than 620 lands you in this less-than-desirable category." Bad credit scores are typically a result of late bill payments, high balances of unsecured debt such as that owed on credit cards and poor credit histories such as repossessions, bankruptcies, judgments or liens.
  
  

Income

• Subprime financing typically allows for higher debt ratios than traditional financing. FNMA would like to see the future monthly mortgage payment combined with all other monthly obligations including student loan, auto loan and credit card payments at no more than 36 percent of a borrower's gross monthly income. Subprime financing, however, can allow for these monthly obligations to be up to 50 percent of a borrower's gross monthly income. Note that the gross (pre-tax) income is used in this calculation.
  
  

Assets

• Generally traditional financing requires several months or more of the future monthly mortgage payment in reserves, in the form of liquid assets or mutual fund, stock, bond or pension accounts. Subprime financing, however, is more flexible in this regard and may only require two months or less of the future monthly payment in reserves.
  
  

Interest Rates

• Because subprime mortgages are for borrowers with greater credit, income and asset risks, the interest rates offered by subprime lenders often reflect the risks they're willing to take on these borrowers. According to Investopedia.com, the subprime classification loans offer "rates greater than the prime rate to individuals who are unable qualify for prime rate loans." In this context, "prime" rates are generally the best available rates.
  
  

Mortgage Terms

• Subprime financing is most apparent in its terms. Unlike conventional financing, which focuses on 30-year fixed rates or 5-year adjustable rate mortgages (where the rate is fixed for the first 5 years and adjusts afterward), subprime lending focuses on the short term, in 2- or 3-year introductory rates, with the borrower determining the course of action after these intro rates expire. Care should be given to the level of property appreciation in the area if the assumed course of action is to refinance out of the loan. In many cases, borrowers have not paid down enough on their mortgage balances in such a short amount of time to facilitate refinancing. This is especially important for the borrower engaged in a subprime loan that allowed 97-100 percent financing of the property's value.