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The Washington Post Sunday - - Real Estate -

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.

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