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When it comes to mortgages, it’s important to understand the difference between prime and subprime mortgages. Whether you’re a consumer, investor, or lender, knowing the different qualifications and differences can help you make better financial decisions.

Summary

  • Prime mortgages are loans that meet Fannie Mae and Freddie Mac lending requirements
  • Subprime mortgages are loans given to people with a poor credit history that don’t meet Fannie Mae eligibility requirements
  • There are 7 different types of mortgages available for borrowers
  • Borrowers with a credit score between 620-650 usually qualify for prime mortgage, and borrowers with a credit score over 640 tend to receive better rates
  • Borrowers with a credit score of less than 620 are considered subprime
  • The most common subprime mortgages are adjustable-rate mortgages

What is Considered a Prime Mortgage?

Prime mortgages meet Fannie Mae and Freddie Mac eligibility and guidelines. Fannie Mae and Freddie Mac are the two government-sponsored enterprises (GSE’s) responsible for purchasing the majority of the U.S. mortgages funded by standard lenders.

To be approved for a prime mortgage as a borrower, you need to have good credit history and an income that is 3-4 times greater than the monthly mortgage payment. Borrowers with a credit score between 620-650 usually qualify for a prime mortgage. Prime borrowers or borrowers with a credit score higher than 640 tend to receive lower interest rates on their mortgage.

Prime mortgages generally require borrowers to pay a down payment, most commonly 10%, but can also be as much as 20% if the borrower wants to avoid paying PMI. They save borrowers money and are much safer for lenders due to the higher creditworthiness of borrowers.

Borrowers with a credit score below 620 will fail to qualify for a prime mortgage under Fannie Mae and Freddie Mac guidelines. Mortgages that do not meet Fannie Mae and Freddie Mac’s eligibility requirements are considered sub-prime mortgages.

Different Types of Prime Mortgages

There are 7 different types of mortgages that are available for borrowers and each one features its own set of rules and requirements.

  • Conventional Mortgages
  • Fixed-Rate Mortgages
  • Adjustable-Rate Mortgages
  • FHA Loans
  • USDA Loans
  • VA Loans 
  • Jumbo Loans

What is Subprime Mortgage?

A subprime mortgage is a type of mortgage that is given to people with a poor credit history, typically below 620. In most cases, people with a credit score below 620 will fail to qualify for a conventional mortgage. Borrowers who are classified as “subprime” pose a higher default risk to mortgage lenders. Therefore, underwriting requirements for subprime mortgages will be different than those for standard mortgages.

Recommended Reading: Difference Between APR and Interest Rate

To account for this risk, subprime borrowers and mortgages will have higher interest rates. The term “subprime” doesn’t refer to the interest rate associated with the mortgage, but rather the creditworthiness of the borrower applying for the mortgage.

The interest rate for a subprime mortgage depends on four different factors:

  • Size of the down payment 
  • The credit score of the borrower
  • Number of late payments on a borrowers credit report
  • Type of delinquencies on the borrower’s credit report

Important Note: Lenders ARE NOT legally required to give you the best mortgage terms. So even if you think you won’t qualify for a conventional mortgage, it’s recommended that you at least try or wait until your credit history improves.

Types of Subprime Mortgages

There are different types of subprime mortgages, but the most common one is an adjustable-rate mortgage. An adjustable-rate mortgage can also be classified as a prime mortgage. The reason being is that borrowers with a good credit score who plan on only having a mortgage for a short period of time can opt-in for adjustable-rate mortgages.  

An adjustable-rate mortgage will initially charge a fixed interest rate, and when the term comes up it will change to a floating rate which can increase your monthly payment significantly.

Subprime Mortgage vs. Prime Mortgage

In simple terms, the main difference between a subprime mortgage and a prime mortgage is the interest rates they charge. A subprime mortgage is issued to borrowers with poor credit and prime mortgages are issued to borrowers with good credit. The prime vs subprime credit score ranges vary depending on the lender. Most lenders use the following credit score ranges below to classify borrowers.

prime and subprime credit ranges


Pros and Cons of Subprime Mortgages

Below are the prose and cons of subprime mortgages.

ProsCons
Allows people with low credit scores to own a homeClosings costs and interest rates tend to be higher
Subprime loans can help people fix their credit scoresBorrowers must show that they have sufficient income to finance the loan
Subprime mortgages can be used for a short period of timeYour interest rate can go up if you get an adjustable rate mortgage

Subprime Mortgage Lenders 2021

Below is a list of some of the top subprime mortgage lenders. Each one will have their own lending and underwriting requirements.

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