Subprime Mortgage Explained: Rates, Types, Risks, and Smart Alternatives

Yes. Since the 2008 crisis, the Consumer Financial Protection Bureau (CFPB) has implemented “Ability-to-Repay” rules. Lenders must now verify a borrower’s income and assets to ensure they can realistically afford the loan. Predatory features like “negative amortization” (where the loan balance grows despite making payments) are also largely restricted.

Yes. In fact, many people use subprime mortgages as a “bridge.” After 2–3 years of on-time payments, your credit score may improve enough to refinance into a prime mortgage with a much lower interest rate.

Subprime rates are typically 2% to 5% higher than prime rates. While a prime borrower might see a 6.5% rate, a subprime borrower might be quoted 9% to 11%.

It might be right if you have a stable income but a low credit score, and you have a pressing reason to buy now rather than waiting to repair your credit. However, if your budget is already tight, the higher monthly payments and potential for rate hikes could put you at risk of foreclosure.

Before choosing a subprime loan, look into FHA loans, which allow scores as low as 500 with a 10% down payment. Other options include finding a co-signer with better credit or looking for local first-time homebuyer grants.

The primary downsides are the high subprime mortgage rates and substantial fees. Because the interest is higher, you will pay much more over the life of the loan. There is also the risk of “payment shock” if you have an adjustable-rate mortgage and the rates reset higher.

The most common is the Subprime Adjustable-Rate Mortgage (ARM), such as a 2/28 or 3/27 loan. These have a fixed rate for the first two or three years, followed by a floating rate for the remainder of the term. Other types include Subprime Fixed-Rate Mortgages (often with 40 or 50-year terms) and Interest-Only Loans, where you only pay the interest for an initial period.

The biggest advantage is accessibility. It allows people with damaged credit or non-traditional income (like the self-employed) to stop renting and start building equity. It can also serve as a tool to rebuild credit if payments are made consistently.

Generally, a FICO score below 670 is considered subprime. However, some lenders specialize in “deep subprime” loans for scores below 580, while others may offer near-prime terms for scores in the low 600s.

A Dignity Mortgage is a specialized subprime product where the borrower puts down a larger deposit (usually 10%) and agrees to a higher interest rate. If they make on-time payments for a set period (like five years), the rate automatically drops to a prime level.