What Is a Subprime Mortgage?

A subprime or non-prime mortgage is a loan option for home buyers with credit scores too low to meet the prime threshold, generally a score of 620. A subprime mortgage can help you buy a home even if your credit history shows things like a bankruptcy, foreclosure or short sale.

How does a subprime mortgage work?

A subprime mortgage is a home loan designed for borrowers with lower credit scores, typically under 620.

The term "subprime" describes the risk level of a mortgage based on the borrower’s creditworthiness, rather than the loan's structure. Generally, if your credit needs work and your score is considered subprime, you’ll pay a higher interest rate. That means higher monthly payments and more interest over the life of the mortgage.

Prime vs. subprime mortgages

A prime mortgage is for buyers with good to excellent credit, while a subprime mortgage is for those with fair or poor credit, typically a score under 620.

• Prime mortgages are for borrowers with better credit and lower risk to lenders. Typically, you’d be considered a prime or near-prime borrower if your credit score is 620-720 or higher. Prime mortgages have lower interest rates, smaller down payment requirements and more favorable terms overall.
• Subprime mortgages are for borrowers with a weaker credit history and lower score, usually 580-620, or even lower than 580. While these loans make homeownership possible, they come with higher costs that reflect the lender's increased risk. You'll pay more in interest and fees, make a larger down payment — often 20% or more — and face stricter terms compared to prime financing.

The basic loan application and closing process is similar between prime and subprime mortgages. You’ll apply for the loan, provide documentation as required by the lender and await the underwriting decision. The below table outlines some general, estimated differences between prime versus subprime mortgages.

Subprime mortgage requirements

To qualify for a subprime mortgage, lenders require evidence that despite your credit challenges, you’ll have the ability to repay a loan. That includes proof of stable employment and income, as well as enough assets for a down payment, closing costs and reserves.

Credit score

Generally, subprime mortgages are for borrowers with credit scores between 580-620, and often lower. Your subprime lender may have a specific minimum score requirement.

Down payment

Subprime mortgages typically call for a larger down payment than conventional financing, which only requires a minimum of 3% or 5% down. The down payment percentage varies, but expect that you may need 20% or more. 

If you have a lot of cash to put down, though, you may not need a subprime loan. Here’s a general guide:

Use Zillow’s Down Payment Calculator to estimate your potential upfront costs when buying a house.

Debt-to-income ratio

Your debt-to-income ratio (DTI) compares your monthly debt obligations (loan payments) to your gross income. This gauge helps the lender determine how much you can afford alongside your other obligations. A subprime mortgage has more flexibility in this regard: You may be able to have a DTI of 50% or higher, in contrast to a conventional loan, which allows a maximum DTI of 36%-50%.

Employment and income verification

You'll need to demonstrate steady employment and consistent income through pay stubs, W-2s and tax returns. If you’re self-employed, you’ll also need to provide additional documentation, including your tax returns and profit-and-loss statements for your business.

Reserves

Beyond the larger down payment, your subprime lender may require you to have a certain amount of cash reserves on hand, such as one year’s worth of mortgage payments. 

Types of subprime mortgages

Adjustable-rate mortgage (ARM)

Adjustable-rate mortgages are common in subprime lending. These loans start with a lower interest rate and lower monthly payment for an initial period, typically 5, 7 or 10 years. After the initial period, the rate adjusts periodically based on market conditions.

The initial low rate can make homeownership seem affordable, but you’ll need to plan for potential payment increases when the rate adjusts. These increases can be significant and strain your budget if you're not prepared.

Fixed-rate mortgage

Some lenders offer fixed-rate subprime loans where your interest rate stays the same throughout the loan term. While these loans come with higher rates than prime mortgages, the stability of fixed payments may help with long-term budgeting and financial planning.

Interest-only loan

Interest-only loans allow you to pay only interest for an initial period, typically 5-7 years. After that period, you pay both principal and interest, which will increase your monthly payment, often dramatically. These loans require careful consideration of your long-term ability to handle higher payments.

Pros and cons of subprime mortgages

Advantages

• Access to homeownership: The primary benefit of a subprime mortgage is the ability to buy a home with fair or poor credit. For some, this type of loan may be the only path to building equity and longer-term wealth. 
• Opportunity to build credit: Whether it’s subprime or prime, reliably paying your mortgage helps improve your credit score over time. That can position you to refinance into better loan terms later on.
• Good credit not required: You don't need flawless or even good credit to qualify for a subprime mortgage. Lenders of these types of loans understand that past financial challenges don't necessarily predict future behavior, especially if you've taken steps to improve your situation.
• More protections since subprime crisis: After the 2008 recession, regulators implemented stronger consumer protections, now requiring mortgage lenders to verify the borrower’s ability to repay by scrutinizing income, assets and more. Whether it’s a prime or subprime loan, a lender can't approve a mortgage without this verification.

Disadvantages

• Higher interest rates: The most significant drawback to a subprime loan is the cost. These loans come with a higher interest rate, which equate to a higher monthly payment and much more interest paid over the life of the loan.
• Larger down payment:  A subprime mortgage can help you get a home, but it often requires a substantial down payment. This may be a barrier, especially for first-time buyers who haven't built equity in a previous home. 
• Higher closing costs: Typically, subprime mortgages also charge higher closing costs and fees. These additional expenses may deplete your savings cushion or make it harder to put more money down.
• Risk of adjustable rates: If you take a subprime ARM, you’ll need to prepare for the possibility of a higher rate and monthly payment. If not, your mortgage may become unaffordable.

How to get a subprime mortgage

The process of getting a subprime mortgage isn’t all that different from getting a prime mortgage, though it may be harder to find a lender that specializes in subprime loans. 

1. Check your credit reports and scores. Before you set out to get a subprime loan, request your free credit reports and review them carefully for errors. Even small mistakes like incorrect contact info can lower your score, so if you spot something, dispute it right away for a relatively quick boost.
2. Reach out to a broker. A mortgage broker can help you determine whether you’d qualify for a prime or subprime loan. They can also help you compare lenders and loan types based on your credit, down payment and more.  At Zillow, you can find lenders that offer subprime mortgages and begin the pre-qualification process.
3. Get pre-approved. You’ll need to provide the broker or lender with documentation including recent pay stubs, W-2s, tax returns and bank statements. If eligible based on this information, you’ll receive a preapproval letter with the loan amount and interest rate you qualify for. 

Alternatives to a subprime mortgage

A subprime mortgage isn’t the only way to buy a home with bad credit, and it may not be the best method due to the cost. The main alternative to a subprime loan is a government-backed loan.

FHA loans

FHA loans help many first-time buyers and buyers with lower credit purchase homes, in part because they're backed by the government.

You may qualify for an FHA loan with a credit score as low as 500 if you have at least 10% to put down. Otherwise, you’ll need a credit score of at least 580 and a minimum down payment of 3.5% down. Either scenario may be better than a subprime loan, which typically requires a larger down payment. Learn more about the pros and cons of FHA loans. 

VA loans

If you're an eligible veteran, active-duty service member or surviving spouse, consider a VA loan, which doesn’t have minimum credit score or down payment requirements. (Some VA lenders require at least 620, however.) The latter makes them significantly more affordable than subprime loans.

USDA loans

A USDA loan is a zero-down loan for borrowers with lower to moderate incomes buying a home in an eligible rural area. (Many suburban areas qualify under USDA guidelines.)

Like VA loans, there isn’t a specific minimum credit score with USDA loans, though many lenders look for at least 640. Still, if the home is in an eligible area and your income doesn’t exceed limits, a USDA loan can be an affordable alternative to a subprime mortgage.

Tips for success with a subprime mortgage

A subprime mortgage can help you buy a home, but that doesn’t mean you have to pay high interest for the long haul. Ideally, a subprime loan should serve as a stepping stone to another more affordable loan type. 

Improve your credit

The best way to get out of a subprime mortgage is to improve your credit in order to refinance to a different kind of loan. Pay down credit card balances, make all payments on time, avoid opening new credit accounts and dispute any errors on your credit report. Keep track of your credit over time, too.

We're eager to help you explore all possibilities. Taking time to strengthen your financial profile often pays dividends in better loan terms and lower costs. If you’re currently renting, you can use your on-time rent payments to build credit with Zillow Insurance Services.

Save for rate adjustments and future loans 

If you have a subprime ARM, budget carefully to ensure you can afford your payments if rates increase. Strive to build emergency savings, as well, so that unexpected expenses don't derail your mortgage payments.

Plan for refinancing

As you make on-time payments and improve your credit, you may qualify to refinance into a conventional or FHA loan with better terms. Generally, you can’t refinance a mortgage until you’ve had the loan for at least six months. 

Is a subprime mortgage right for you?

A subprime mortgage isn't right for everyone, but it can be the key that unlocks homeownership when other doors are closed. Make sure you understand the full financial picture and explore alternatives.

Consider these questions:

• Can you afford the higher monthly payments long term?
• Do you have a plan to improve your credit and refinance later?
• Have you considered alternative loan programs?
• Are you prepared for potential rate increases if you choose an adjustable-rate mortgage?
• Does buying now make sense, or would waiting to improve your credit serve you better?
• Would it make sense to have a co-signer with good/excellent credit?

Talk with a qualified mortgage professional who can review your specific situation and help you make an informed decision.

Frequently asked questions

*Zillow Home Loans; an equal housing lender. NMLS #10287

Disclaimer: This article provides general information about mortgages and credit requirements. Loan programs, rates and requirements vary by lender and individual circumstances. For personalized guidance, consult with a qualified mortgage professional.