“Prime” deals with customers who have good credit and do not require special rules, or fall into special categories (such as higher financing limits, poor credit, lack of credit, unable to document income, no assets, etc). Sub-prime deals with customers with lower credit scores and poor repay history, including bankruptcies, past foreclosures, poor work history, etc. Usually, sub-prime also means a much higher rate and stricter terms and pre-payment penalties. FICO scores of 620 or lower usually starts Sub-Prime, but it can include some borrowers with poor credit history (or other issues) with scores much higher than 620.
As a mortgage lender, I can tell you that the lines are getting blurrier, even as I type this.
Fannie Mae used to buy only “prime loans”, however years ago with the “expanded approvals”, they reached further and further into “sub-prime” territory.
I even used a sub-prime wholesale lender last month to BEAT a Fannie Mae loan’s payment!!
Nothing is simple in lending. It is almost as complicated as law.
PRIME
- Borrowers who meet or exceed the standard guidelines
a.) Credit Scores
b.) Documentation (income, employment, assets, etc.)
c.) Loan is 80% or below the appraised value
SUBPRIME
- Borrowers who falls short of the standard guidelines
a.) Credit Scores – 679 and below
b.) Credit Rating (some may have scores above 720; but rating
shows a BK, judgments, liens, other derogatory factors
c.) Unverifiable employment, income, assets, residency, etc.
d.) Loan Amount exceeds 80%
e.) Property Occupancy
SUMMARY:
Subprime borrowers have more exemptions needed than the prime borrowers, which, consequentially, will require more risk-mitigating rate pricing adjustments, as what others mentioned – ending up with a higher interest rate than the prime borrowers.
5 Responses to In mortgage lending, what is the meaning of, prime and sub-prime?
bostonianinmo
February 25th, 2010 at 7:02 pm
Prime: First rate credit. Gets the best rates
Sub-Prime: Not so good credit. Pays higher rates.
citronge
February 25th, 2010 at 7:57 pm
What he said!
Brad S
February 25th, 2010 at 8:45 pm
“Prime” deals with customers who have good credit and do not require special rules, or fall into special categories (such as higher financing limits, poor credit, lack of credit, unable to document income, no assets, etc). Sub-prime deals with customers with lower credit scores and poor repay history, including bankruptcies, past foreclosures, poor work history, etc. Usually, sub-prime also means a much higher rate and stricter terms and pre-payment penalties. FICO scores of 620 or lower usually starts Sub-Prime, but it can include some borrowers with poor credit history (or other issues) with scores much higher than 620.
PlatinumREI.com
February 25th, 2010 at 9:06 pm
As a mortgage lender, I can tell you that the lines are getting blurrier, even as I type this.
Fannie Mae used to buy only “prime loans”, however years ago with the “expanded approvals”, they reached further and further into “sub-prime” territory.
I even used a sub-prime wholesale lender last month to BEAT a Fannie Mae loan’s payment!!
Nothing is simple in lending. It is almost as complicated as law.
calofficer
February 25th, 2010 at 10:02 pm
PRIME
- Borrowers who meet or exceed the standard guidelines
a.) Credit Scores
b.) Documentation (income, employment, assets, etc.)
c.) Loan is 80% or below the appraised value
SUBPRIME
- Borrowers who falls short of the standard guidelines
a.) Credit Scores – 679 and below
b.) Credit Rating (some may have scores above 720; but rating
shows a BK, judgments, liens, other derogatory factors
c.) Unverifiable employment, income, assets, residency, etc.
d.) Loan Amount exceeds 80%
e.) Property Occupancy
SUMMARY:
Subprime borrowers have more exemptions needed than the prime borrowers, which, consequentially, will require more risk-mitigating rate pricing adjustments, as what others mentioned – ending up with a higher interest rate than the prime borrowers.