What Is a Subprime Mortgage?
A subprime mortgage — also referred to as a “bad credit mortgage” or an “alternative mortgage” — is a financing option for home buyers who don’t meet the typical mortgage approval requirements set by traditional banks and credit unions.
Many Canadians consider subprime mortgages to be taboo, especially after the subprime mortgage crisis in the United States. But like many financial products, subprime mortgages have pros and cons to consider.
Pros and cons of subprime mortgages
Pros
- Allows certain individuals to buy a home without waiting until they qualify for a prime loan.
- Easier to get approved.
- May help you rebuild your credit.
Cons
- Higher mortgage interest rates.
- Higher closing fees and associated costs.
- May be limited to shorter terms than prime mortgages.
How subprime mortgages work
Who is a subprime mortgage for?
Some borrowers don’t meet the qualification standards at Canada’s chartered banks (referred to as A lenders). A borrower’s credit score might not meet the minimum for a mortgage or their income might be difficult to verify (as it is for seasonal workers and the self-employed).
These borrowers’ credit situations are considered less than ideal, so they, and the mortgages they’re offered, are classified as subprime.
Just because an individual doesn’t necessarily have a good credit score or a traditional job, it doesn’t always mean they’re unable to handle a mortgage. Many lenders in Canada offer more qualification leeway than Canada’s chartered banks, and often meet the needs of subprime borrowers.
Where can you get a subprime mortgage in Canada?
Subprime borrowers generally have a few options for getting a mortgage.
Some credit unions might be willing to provide subprime mortgages to their members, but you’ll typically have to seek out an alternative lender, sometimes called a B lender, or a private mortgage provider.
Most alternative lenders don’t work directly with borrowers. If you need a subprime mortgage, plan on finding a mortgage broker to guide you through the process and compare loan offers for you.
Since borrowers who cannot qualify with A lenders are, at least statistically, deemed to be a higher risk, the subprime mortgages offered by B lenders often come with significantly higher interest rates and may involve unique fees or closing costs.
Qualifying for a subprime mortgage
While subprime mortgages do offer more flexibility, there are still certain qualification requirements. Depending on the lender, this may include:
Personal identification and proof of residency, such as passport or SIN number.
Pay stubs or other valid proof of income and employment history.
Bank statements.
Tax returns, T4 slips or notices of assessment.
A minimum down payment, sometimes as high as 20%.
The subprime mortgage crisis
Canadians may have a negative view of subprime mortgages due to their starring role in the global financial crisis of 2007 and 2008.
In the early 2000s, 20% of the mortgages in the United States were subprime mortgages.
Many of those subprime mortgages were part of a financial product called ‘mortgage-backed securities’, which offered investors higher returns than government bonds. Mortgage-backed securities quickly gained popularity, which made it easier (and more profitable for the banks) for subprime borrowers to get mortgages.
Excessive subprime lending helped create a housing bubble that popped in 2006.
Home prices collapsed as it became difficult for borrowers to refinance their subprime loans at higher interest rates. People defaulted on their mortgages en masse, mortgage-backed securities lost most of their value and a massive economic downturn commenced.
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