Subprime is anything where you the borrower has less than a perfect application. In the past few years, many lenders have appeared that want to make loans to applicants that historically have been denied loans or that might not otherwise qualify. Why? Well a few say it is to help out, but many smelled money and realized that they could charge more and earn more with a desperate group with few other options and little knowledge of their options, the products and the process.
It basically works like this. The lower the monthly payment, the easier it is to qualify. The comparison of monthly income to a monthly mortgage payment occurs only at the original application. Lenders gave teaser or introductory low interest rates which made the initial payments smaller and allowed qualification for a larger mortgage than otherwise possible.
This leaves no room for problem. Any short period without employment, or an unexpected expense or the increase in the interest rate when the introductory rate disappears can through a tight budget out of whack and result in a default.
Other factors contributing to the increased defaults are low or no down payments, which again mean little or no savings available to cover increased needs.
If you have a subprime loan - you are paying too much.
