Q. I hear people bandy about the term sub-prime loans, but what
makes a loan sub-prime. I figure if anyone can explain this, a mortgage broker
should be able to.
A. There are a number of things that will qualify one (or their loan) as sub-
prime. Among them are:
· A borrower who has a poor credit history or low score. The cut point for
most “A” paper loans is a FICO score below 620.
· A borrower who has insufficient income for their obligations, that is with Debt to Income Ratios (a.k.a. DIRs) above 40-45%
· A borrower who has a recent bankruptcy or foreclosure (usually less than 2 years, although with stated income loans and LTVs > 80% it may be 4-7 years).
· A borrower who has been late on their mortgage within the past two years
· A borrower who has been late on their HELOC more than once in the past 12 months
· A borrower who has failed to meet past obligations: 30, 60, 90 day “lates”, charge-offs, collections, tax liens, judgments, etc.
· A borrower who does not meet one or more of prime lending requirements
The last bullet point is a catch-all qualification but because there are so many
variations from lender to lender I couldn’t think of any other way to phrase this.
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