A bank may grant a subprime mortgage to a borrower with a low FICO credit score. The credit score limit varies between lenders, but it is generally below 600. Some lenders may categorize a loan as subprime if the borrower’s credit score is at or below 640.

Subprime mortgages were extremely prevalent before the subprime mortgage crisis and the broader financial crisis that occurred in 2008. 

Although the Dodd-Frank Act essentially disbanded subprime mortgages, they still exist today but are subject to more stringent regulation. In the United States, the subprime mortgage has been rebranded as a non-qualified mortgage (non-QM loan).

Characteristics of non-qualified mortgages:

  1. The loan does not meet the Consumer Financial Protection Bureau (CFPB) consumer protection standards.
  2. Non-QM loans are available to borrowers with a lower credit score and higher levels of existing debt.
  3. Non-QM loans have a higher interest rate than qualified mortgages.
  4. Non-QM loans requires a larger down payment.
  5. Lenders will still verify income, assess the borrower’s debt-to-income (DTI) ratio, and evaluate the borrower’s ability to repay (ATR).

Although borrowers would prefer to have a qualified mortgage, if their profile does not meet the requirements, a non-qualified mortgage may be an alternative option.