💳 What Is a Subprime Mortgage in Real Estate?

A Subprime Mortgage is a home loan offered to borrowers with lower credit scores or limited credit history. Because lenders view these applicants as higher risk, subprime mortgages often come with higher interest rates, stricter terms, and greater long-term costs than conventional loans.

How a Subprime Mortgage Works

Subprime mortgages are designed for borrowers who do not qualify for traditional loans due to poor credit, high debt-to-income ratios, or a recent financial setback. Because of the increased risk, lenders offset the risk with more expensive loan features.

Common characteristics of subprime mortgages include:

  • Higher interest rates than prime loans
  • Adjustable-rate mortgages (ARMs) with rate increases over time
  • Higher down payment requirements
  • Lower credit score requirements (often below 620)
  • Stricter penalties for late payments or default

Some subprime loans use “teaser rates” — low introductory interest rates that increase significantly after the initial period, often creating payment shock.

Why Subprime Mortgages Matter

Benefits for Borrowers:

  • Allows buyers with low credit to purchase a home
  • May provide entry into homeownership sooner
  • Can be refinanced later into better terms after credit improves

Risks and Challenges:

  • Much higher long-term interest costs
  • Higher chance of default if rates increase
  • Payment shock when ARM rates reset
  • Stricter penalties for missed payments

Subprime mortgages played a major role in the 2008 housing crisis, as many borrowers could not afford the rate increases once adjustable-rate loans reset.

Examples of Subprime Mortgages

Examples of subprime loan structures include:

  • 2/28 ARM: Fixed for 2 years with a large rate increase afterward
  • 3/27 ARM: Fixed for 3 years, then adjusts annually
  • Interest-only subprime loans with no principal repayment early on
  • “No-doc” loans requiring little income verification

These mortgage products are far less common today due to tighter lending regulations, but some variations still exist under non-QM (non-qualified mortgage) programs.

Why It Matters for FSBO Buyers & Sellers

FSBO participants may encounter subprime mortgages when:

  • Buyers are financing a purchase with a non-QM or subprime loan
  • Sellers are evaluating buyer offers requiring special lender approval
  • A buyer’s subprime loan slows down underwriting or closing
  • Sellers need to understand a buyer’s lender conditions or restrictions

Sellers listing through Flat Fee MLS can attract a wider pool of buyers, including those using non-traditional financing.