Last Updated on November 3, 2023 by Eric Jeanette
Subprime vs Nonprime Mortgages
We will share with you the definitions and differences between subprime and nonprime mortgages.
What’s the difference between subprime and non-prime mortgages?
Many will cringe when they hear the word “subprime mortgage”, and for understandable reasons. There was very little regulatory oversight in the mortgage industry more than 15 years ago. As a result, many of the loan products that mortgage lenders were issuing proved to be disastrous for the borrower, for the banks, and for society as a whole. As most of us know, the subprime mortgage crisis was a major contributor to the global mortgage meltdown of 2008.
A non-prime mortgage could be considered the “new and improved” version of the old subprime mortgages. There now exists much more responsible underwriting, preventing mortgages being issued to unworthy borrowers.
On a positive note, those who would be capable to keep up with their mortgage payments, but have been locked out of the market in recent years, are starting to have opportunities to own their own home. I guess you could say non-prime mortgages are the more responsible version of subprime mortgages, which are much harder to find now.
The guidelines for non-prime lending are more strict here than the reckless loan products that existed 10 years ago. Previously, someone with a low credit score (such as in the 500s) could easily get a mortgage, and they could do so with very little money down. Nowadays, if a borrower does not qualify for a prime loan, they are classified as non-prime, and must prove their income and put more money down.
There are some cases, however, where someone with poor credit still may qualify for a FHA loan which only requires a 3.5% down payment. You can also get an FHA loan with scores down to 500 but with a 10% down payment.
Subprime Mortgages vs Non-Prime Mortgages
Below are some examples of the differences between the subprime mortgages of the early 2000s, and the non-prime mortgage products of today are:
- Subprime Mortgages (past) – In 2008, the average credit score to qualify for a subprime mortgage was a 580. And in many cases, no income documentation was required at all! Another component of the old subprime mortgages was that someone with a low credit score, and limited income verification could get a mortgage with very little for their down payment.
- Non-Prime Mortgages (present) – In 2023, the average credit score of a non-prime mortgage is a 660 although options with lower scores are available. Also, income documentation may be required on a non-prime loan. Some will be glad to know that there are alternative methods to verify your income (such as using bank statements to prove your income). These mortgages are referred to as bank statement loans.
Some examples of situations which may require a non-prime mortgage are as follows:
- Low credit scores
- Recent bankruptcy
- Recent foreclosure
- Cannot provide tax returns
- No social security number
- Gaps in employment history
- High debt to income ratio
Loan Terms for Subprime and Nonprime Mortgages
What you can expect from both subprime and nonprime mortgages are less than optimal credit terms. When compared to conventional or FHA loans, nonprime mortgages often require a higher down payment. You should also expect to be offered a higher interest rate due to the risk associated with a nonprime loan.
The best way to find out what you qualify for is to speak with one of our loan specialists, who will be able to quickly refer you to the best non-prime lender in your state. Depending on your specific situation, such as your job history, credit scores, and how much you want to put down, we will do our best to match you with the best lender in your state.