Good Credit Home Loan, Bad Credit Home Loan

A subprime loan, in its most simple form, refers to a borrower not meeting the standards of Freddie Mac and Fannie Mae.  This may or may not refer to a borrower’s credit ratings or payment history; however these are characteristics which typically preclude a borrower’s subprime rating.

If you only qualify for a subprime home loan, you can expect difficulty with finding a mortgage lender willing to finance your home as the recent mortgage meltdown and credit crisis has substantially reduced the subprime home loan market.  The number of mortgage lenders willing to make these high risk home loans has dwindled substantially.

Generally speaking, a credit score below 620 is considered a high risk home loan, or “subprime paper” (also known as B-Paper, Near Prime, Non-Prime, or Second Chance Lending).  A mortgage lender prices in the increased risk of borrower default in the form of higher interest rates and/or home loan fees, yearly fees, other charges, a prepayment penalty, and private mortgage insurance (PMI).  The increase in home loan interest rate is determined by the perceived risk to the mortgage lender of a borrower default on the home loan.

The following issues may keep a borrower from qualifying for a prime home loan:

• A credit score (FICO) of less than 620 (depending on the product/collateral)
• Two or more loan payments paid past 30 days within the last year
• One or more loan payments paid past 90 days due within the last three years
• Judgment, foreclosure, repossession or default on a loan in the past
• Accuracy of the credit line data obtained by the underwriter
• A bankruptcy within the last 7 years

This is why it’s critically important to achieve and maintain excellent credit history.  An excellent credit score and a clean credit report directly translates into money in your pocket as you’ll expect and get a lower interest rate and fees on your home loan.  Learn more about your credit report and how your credit score affects your ratings here.

It’s even more important to get multiple home loan interest rate quotes online for a marginal credit or sub-prime borrower as the mortgage lender’s interest rate adjustment will vary much more widely than a normal home loan quote for a conforming loan.