What does "subprime mortgage" refer to?

A subprime mortgage refers specifically to loans provided to borrowers who have lower credit scores. These borrowers are considered higher risk by lenders due to their past credit behavior, which may include late payments or defaults. Because of this increased risk, subprime mortgages typically come with higher interest rates as a means for lenders to compensate for the possibility of borrower default.

This classification is important because it influences the terms and conditions under which such loans are issued. Borrowers with lower credit scores may not qualify for prime loans, which are offered to those with better credit histories, thereby leading them to seek subprime options even though they entail more financial burdens.

Understanding subprime mortgages is crucial for recognizing the dynamics of the housing market, particularly regarding lending practices and borrower eligibility. Other categories, such as loans with minimal down payments or federal guarantees, do not inherently pertain to the creditworthiness of the borrower, as the defining factor in subprime lending centers on credit risk.