Subprime lenders are unlike mainstream lenders in that they lend to borrowers who do not qualify for loans from mainstream lenders. Often they are affiliates of mainstream lenders and are in business under a different business name. Sometimes, they are independent. In some instances, a lender may offer both types of loans: subprime and mainstream.
What separate subprime lenders from mainstream are their higher prices and the ease with which a borrower with less-than-perfect credit qualifies for the loan. If at all possible, the borrower would be wise to try first to qualify with a mainstream lender in order to save money.
Generally a low credit score is enough to disqualify a borrower from securing a mainstream loan. If his score is midstream, he may or may not disqualify, sometimes depending on the amount of the down payment he is able to place on his loan. Sometimes other factors are taken into consideration, depending on what type of property a borrower intends to purchase. For instance, it would be easier for him to qualify if purchasing a single family home as a residence as opposed to him purchasing an apartment building as an investment property.
Something to remember when dealing with a subprime or mainstream lender is that the amount of the borrower’s down payment and his credit score weigh heavily on how high or low a lender’s rates and fees will be. Of course, a low down payment and low credit score would indicate greater risk to the lender and cause a higher cost to the borrower no matter which lender he is dealing with.
Since subprime lenders deal with borrowers with lower credit, it’s no surprise the more subprime loans go into default than prime loans.
A significant difference between subprime loans and mainstream loans is that, unlike mainstream loans, subprime loans are often not required to have escrow of taxes and insurance.
Although a borrower might not qualify for a mainstream loan, he may find that a subprime loan will enable him to build or re-build his credit.