What's All the Buzz on Sub Prime Mortgages

Headaches on the Big Board

Some increases in defaults by low qualified home buyers have caused quite a flutter in the financial world. According to the Home Mortgage Banking Association. Late paying borrowers rose to 13.33 and defaults on mortgages in the sub prime mortgage arena are at an all time high, according to Bloomberg.com. So, what is the sub prime mortgage and how does it effect average people? In short, the majority of loans are not effected. The sub prime loan is geared for borrowers with less than perfect credit and many do not require a down payment.

A sub prime lender is one who lends to borrowers who do not qualify for loans from mainstream lenders. These borrowers have less than a 660 credit score. Essentially a prime lender considers the ratio of total debt to income and the ability to document income and assets. For those in the gray areas or outside the criteria of the prime lender the sub prime lender provides a means to obtain property. The factors taken into consideration in charging rates is similar between the sub prime mortgage broker and the prime lender.

Mortgage brokers in the sub prime arena generally provide a variety of loan packages. The difference between the prime lender and the sub prime lender is the rates, costs and charges are higher for the sub prime area to offset risk and the amount of paper work involved. The sub prime mortgage generally has a stiff prepayment penalty for paying off the debt early. The other difference is that taxes and insurances may not be encumbered like prime lender mortgages, according to Jack M. Guttentag, Professor Emeritus Wharton School of Business; MTprofessor.com.