Real Estate Terminology

subprime loan or subprime mortgage

A loan made to a borrower that has a poor credit record or to a party who would not obtain a loan from most other finance sources. For example, a borrower who has no income, no job or no assets (NINJAs); does not wish to provide any proof of income or details of assets or liabilities; has an adverse credit record; has an existing high level of debt (especially when combined with an existing mortgage to another lender); or one who has made an arrangement to prevent immediate bankruptcy. Generally a subprime loan is secured by a home mortgages and as a rule the borrower pays a higher fee and a higher interest rate compared to a conventional mortgage loan to compensate the lender for the greater risk of default. It is common practice for a subprime loan to place limits on the ability of the borrower to reduce the interest rate during the term of the loan and the loan may well carry a penalty for early repayment. A mortgage granted on the basis of limited information or documentation provided by the borrower may also be called a ‘low-doc mortgage’. Also spelled ‘sub-prime’. See also Alt-A loan.

Terms in bold are defined elsewhere in the Encyclopedia