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Are you a subprime borrower?

In terms of qualifying for loans, "prime" status is like gold. As one might expect, consumers who qualify for the best interest rates from lenders are those with good credit scores and minimal debt.

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On the other side of the coin are what lenders call subprime borrowers, those who get quoted higher numbers.

There's not a hard and fast rule of what constitutes "subprime," because these labels are really up to the lender.

But in general, banking regulators consider subprime borrowers as those with:

  • a FICO score of 660 or lower
  • two or more 30-day delinquent payments in the past 12 months, or one 60-day delinquency in the past 24 months
  • a foreclosure or charge-off in the past 24 months
  • any bankruptcy in the last 60 months
  • qualifying debt-to-income ratios of 50 percent or higher
  • limited ability to cover monthly living expenses.

Other lenders, such as mortgage bankers, may have their own system for categorizing borrowers.

While subprime borrowers can expect higher rates, the "how much" varies. "There are shades of subprime," explains George Yacik, vice president of SMR Research Corp., which has conducted studies on the U.S. credit card industry. "There is someone who just misses getting the best deal and someone who's right out of bankruptcy court."

New term on the block
Here's one piece of good news for those qualifying for subprime rates: In the past, those who didn't have prime credit were often rejected for loans altogether. "Now you're talking about a market that's going to serve anyone," notes James Ballentine, director of grassroots and community outreach at the American Bankers Association.

"Regardless of your credit history, there's probably a loan out there for you. You will just pay it according to the risk associated with that loan."

In the early 1990s, the industry began moving in this direction to extend more loans to the greater population, Ballentine adds.

That worked out well for those pursuing the American dream of home ownership. "My guesstimate, based upon gleanings from the trade press, is that somewhere on the order of 20 percent of the total market for mortgages is subprime," says Keith T. Gumbinger, Vice President of HSH Associates, a Pompton Plains, N.J., real-estate information firm."In the past few years, literally millions of subprime loans have been made."

Total subprime lending, even just a few years ago, was in the tens of millions. Today, it's a multi-billion dollar market.

The subprime borrower
Just who are these subprime borrowers? According to a recent Fannie Mae Foundation report on predatory lending, the market has seen exponential growth in lower-income, minority communities. U.S. Department of Housing and Urban Development (HUD) data shows that subprime loans are three times more likely in low-income neighborhoods than in high-income areas, and five times more likely in black neighborhoods than white ones. Even in high-income black neighborhoods, homeowners are twice as likely to have subprime loans as homeowners in low-income white neighborhoods.

Low-income "borrowers are more likely to have limited access to credit and may begin their credit lives in subprime territory," Gumbinger says, but "you don't need to be poor to mess up your credit."

Next: No one group or individual is immune from the subprime bug
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