Subprime mortgages

Subprime mortgages

• a housing loan that's granted to borrowers with impaired credit history. 
• Often, they have no credit history whatsoever. 
• Their credit scores don't allow them to get a conventional mortgage. 
• Subprime borrowers typically have low credit scores, such as a FICO of 660 or below
• They're subprime if they have gone bankrupt in the last five years
• Exotic mortgages
• Offers lower monthly payments in the first few years but is considered high-risk because of its higher future term payments
• These loans were cheap in the beginning but made profits for the banks later on. 
• Most had low "teaser" rates for the first year or two. 
• Many borrowers didn't realize that rate rose dramatically after that. 
• Others thought they could sell the house or refinance before then
• Types of subprime loans
• e.g., Interest-only loan 
• doesn't require that any of the principal be paid for the first several years of the loan. That makes it easier to afford than any other loan. Most borrowers assume they will either refinance or sell their house before the principal needs to be repaid. 
• That's very dangerous because that's when the monthly payment increases. They usually can't afford the higher payment. 
• If the value of the home drops, then they can't qualify for a refinance. They can’t sell the house either. In this case, they are forced to default because they can't make the higher payment.