QAReal estate editor Maryann Haggerty and columnist Elizabeth Razzi expand on a topic from a recent online chat. Rockville: I’m confused about subprime loans. Does it always mean the borrower was a bad risk in some sense, like income was below ratios or that a credit score was low? Or does it sometimes refer to the loan itself having terms typical of those for high-risk borrowers, even if the particular borrower qualified for a better product? Elizabeth Razzi: You have good reason to be confused, because the term “prime” refers to the borrower’s qualifications as well as to the loans. The dividing line between prime and subprime generally is the FICO credit score. Most lenders consider a borrower with a score of 620 or lower to be eligible only for subprime loans.
Those loans aren’t as attractive as those offered to borrowers with better credit. They’re usually adjustable-rate mortgages with higher rates and more frequent adjustments than on prime loans. They often carry large prepayment penalties.
Here’s the really confusing part: A borrower with a FICO score above 620, who presumably could qualify for a prime mortgage, might fall into the subprime world if that borrower happens to ask for a loan from a subprime specialist, or from a broker who is focused on his own fee rather than the customer’s best interest. That’s why it pays to know your FICO scores before you shop. Get them at www. myfico.com.
Maryann Haggerty: Some consumer advocacy groups are particularly concerned that people are unwittingly pushed into high-cost loans when their finances and credit scores do not merit it — lending that crosses the line from costly to predatory.