What is a Subprime Mortgage and How Does it Work?
A subprime mortgage is for borrowers who don’t meet the standard lending criteria. Alternative and private lenders offer subprime mortgage. Since subprime borrowers typically carry more risk, the rates tend to be higher and often come with a fee from subprime lenders.
Before approving you for a mortgage, lenders consider four main factors for borrowers: your income, down payment, credit and the property itself.
Credit is a common reason why you might seek out a subprime mortgage. If you have poor or damaged credit, prime lenders such as the big banks and credit unions might not consider you. That’s when you’ll need to seek out mortgage financing from a subprime lender to close the deal. If you’re new to Canada or lack a credit history, that’s when subprime mortgages can make sense, too.
Although poor credit is often the first thing that comes to mind for subprime mortgages, there are other reasons why you might seek them out. Ideally, when you’re applying for a mortgage, you’re a salaried employee who’s been with their employer for at least two years. Unfortunately, not everyone fits into that category. Some borrowers will need to use stated income (future income not yet earned) to qualify. Likewise, if you’re a business owner not showing very much income, you might need to go with a subprime lender because you don’t have enough income to qualify with a prime lender.
Your credit and income may be perfectly fine, but sometimes it’s the properly itself. If you’re buying a unique property type like a house boat or plot of land, prime lenders may not want to touch it, so subprime lending may be your only choice. Likewise, sometimes you make an offer on a property and the lender discovers issues during the appraisal, which can cause the property to move from the prime to subprime side.