By David Pilley on November 29, 2010
.jpg.aspx?width=75&height=75) You are well aware that being “subprime” means your credit score is at or below 620. You might think that being “prime” means everything above 620, but that isn’t so. Most lenders consider the minimum FICO score to qualify for a prime loan around 680, so there is something in the middle. This area is called “non-prime,” and you should be aware of risks involved with getting a non-prime loan.
While your credit score is an important factor in determining the characteristics of your loan, lenders look at other factors, especially when it comes to getting a mortgage. Your debt-to-income ratio is important, as well as having money for a down payment and having full documentation of your income and assets. To get a prime mortgage loan (a type of loan that can also be referred to as an “A-paper loan”), you need a credit score of at least 680, a debt-to-income ratio no higher than 36%, a down payment of at least 20% the amount of the loan, and full documentation of your income.
Prime loans are therefore known as “B-paper,” “C-paper,” and “D-paper” loans, and the further along the loan is in the alphabet, the harder it will be to pay it back in full. For these types of loans, your credit score is below 640, you have a high income-to-debt ratio, and you paid a small or even no down payment. You may have also had a couple of charge-offs, or you may have also filed for bankruptcy within the past seven years. There will be a high interest rate with these loans, so you will have difficulty with making payments unless you are making a reliable amount of income.
A non-prime loan, therefore, is less risky than a subprime loan but more risky than a prime loan. This type of mortgage loan can also be called an “Alternative-A”, or “Alt-A,” loan. With this loan, you might have a good credit score, but you don’t meet all of the requirements set by Freddie Mac and Fannie Mae to get a prime loan. You might have had a delinquent credit account within the past year (but not a bankruptcy), or your debt-to-income ratio might be around 40%. Getting an Alt-A loan also means you don’t have complete documentation of your income and assets. If you don’t have complete verification of your income, lenders will think this is a risk factor in having the loan paid back.
A non-prime loan is less risky than a subprime loan, but more risky than a prime loan. It is an alternative for those who are just below the minimum of prime. As long as you can make timely payments, “non-prime” is really just a label.
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