The Risky Business of Sub-Prime Mortgages

Though you often hear in the news that the U.S. is in the midst of a “sub-prime mortgage crisis,” it is often hard to understand exactly what this means if you don't know the terminology. A sub-prime mortgage is defined by investopedia.com as:

“A type of mortgage that is normally made out to borrowers with lower credit ratings. As a result of the borrower’s lowered credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan. Lending institutions often charge interest on sub-prime mortgages at a rate that is higher than a conventional mortgage in order to compensate themselves for carrying more risk.” 

Investopedia says that borrowers with credit ratings that fall below 600 will often be “stuck” with these mortgages along with higher interest rates. Borrowers who make late bill payments or declare personal bankruptcy may qualify for this type of mortgage only, so it is practical for borrowers with lower credit scores to wait a while and build up their credit scores before applying for a mortgage in order to ensure their eligibility for a less risky conventional mortgage.  

In short, it is very important to have good credit if you ever want to borrow money. If your credit score isn’t at its best right now, wait until it’s stronger before you apply for a loan—you’ll be glad you did!