In terms of
qualifying for loans, "prime" status is like gold. As one might expect,
consumers who qualify for the best interest rates from lenders are those with
good credit scores and minimal debt.
On the other side of the coin
are what lenders call subprime borrowers, those who get quoted higher numbers.
There's not a hard and fast rule
of what constitutes "subprime," because these labels are
really up to the lender.
But in general, banking regulators
consider subprime borrowers as those with:
- a FICO score of 660 or lower
- two
or more 30-day delinquent payments in the past 12 months, or one 60-day delinquency
in the past 24 months
- a foreclosure or charge-off in the past 24 months
- any
bankruptcy in the last 60 months
- qualifying debt-to-income ratios of 50 percent or higher
- limited ability to cover monthly living expenses.
Other
lenders, such as mortgage bankers, may have their own system for categorizing
borrowers.
While subprime borrowers can expect
higher rates, the "how much" varies. "There are shades
of subprime," explains George Yacik, vice president of SMR
Research Corp., which has conducted studies on the U.S. credit
card industry. "There is someone who just misses getting the
best deal and someone who's right out of bankruptcy court."
New
term on the block
Here's one piece of good news for those qualifying for subprime
rates: In the past, those who didn't have prime credit were often
rejected for loans altogether. "Now you're talking about a
market that's going to serve anyone," notes James Ballentine,
director of grassroots and community outreach at the American
Bankers Association.
"Regardless
of your credit history, there's probably a loan out there for you. You will just
pay it according to the risk associated with that loan."
In the early 1990s, the industry began moving in this
direction to extend more loans to the greater population, Ballentine
adds.
That worked out well for those pursuing the American
dream of home ownership. "My guesstimate, based upon gleanings
from the trade press, is that somewhere on the order of 20 percent
of the total market for mortgages is subprime," says Keith
T. Gumbinger, Vice President of HSH Associates, a Pompton Plains,
N.J., real-estate information firm."In the past few years,
literally millions of subprime loans have been made."
Total subprime lending, even just a few years ago,
was in the tens of millions. Today, it's a multi-billion dollar
market.
The
subprime borrower
Just who are these subprime borrowers? According to a recent Fannie
Mae Foundation report on predatory lending, the market has seen
exponential growth in lower-income, minority communities. U.S. Department
of Housing and Urban Development (HUD) data shows that subprime
loans are three times more likely in low-income neighborhoods than
in high-income areas, and five times more likely in black neighborhoods
than white ones. Even in high-income black neighborhoods, homeowners
are twice as likely to have subprime loans as homeowners in low-income
white neighborhoods.
Low-income "borrowers are more likely to have
limited access to credit and may begin their credit lives in subprime
territory," Gumbinger says, but "you don't need to be
poor to mess up your credit."
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