For a borrower to qualify for a subprime loan, a verified income and a down payment of at least 5 percent on the home are required, according to Stephanie Mojica for SFGate. A subprime loan is offered at a higher interest rate to individuals who do not qualify for prime loans.
Subprime loans are most often offered to individuals with credit scores below 620. These loans have the highest interest rates because lenders consider the borrowers to be at the highest risk for default. In 2007, mortgage lending standards for subprime borrowers became significantly stricter. Before 2007, borrowers were able to submit their "stated income" without verification, and many were not required to make a down payment, notes Mojica.
All borrowers are required to verify their income through pay stubs, tax returns and bank statements. Credit-challenged subprime borrowers must make a down payment at a minimum of 5 percent of the purchase price of the home. The source of the down payment must also be verified. Down payment programs and gifts are usually acceptable; however, lenders still want to ensure the borrower is able to make the mortgage payments each month, explains Mojica.
If potential borrowers are unable to qualify for a subprime loan, they must prove their credit responsibility to the bank. This can be done by obtaining a credit card backed by a savings account and paying it each month. After a year, this is evidence to banks of the borrower's income and responsibility.