What the Heck IS a Subprime Loan?

We have all heard on the news that home forclosures are rising sharply driven by the subprime loan market. Sooooo, what the heck is a subprime loan, and should you be worried? A subprime mortgage is a loan made to borrowers with credit scores below 620. These loans draw a lot of people who could not get approval on a traditional mortgage. Borrowers with bad credit or no money down are able to get into these loans with up to 60 percent debt-to-income ratio as opposed to a maximum of 33 percent on a traditional mortgage. This is a shaky situation regardless of your credit history.

To make the situation worse, the main type of subprime loan today is an ARM (adjustable rate mortgage) called a 2/28. These morgages are sometimes referred to as "exploding arms" (the nickname alone should be a warning!). These ARMs feature a deeply discounted rate for the first two years and which then balloons up to a much higher rate that can climb yet higher every 6 months.

Washington State's forclosure rate is much lower than many areas of the country. In fact, the national numbers are mainly driven by what is happening in California, Florida, Nevada and Arizona. 34 States nation wide actually eperienced DROPS in their forclosure rates this year. So, unless you actually have an "exploding ARM" there is not much to worry about!