What is a subprime mortgage?

• A. A mortgage issued to those with excellent credit scores
• B. A type of mortgage offered to borrowers with poor credit histories at higher interest rates
• C. A government-insured mortgage designed for first-time home buyers
• D. A mortgage with a fixed interest rate for the lifetime of the loan

Answer: (B)

A subprime mortgage is specifically designed for borrowers who may not qualify for standard loans due to having poor credit histories. These loans typically come with higher interest rates compared to prime mortgages, reflecting the increased risk that lenders take on when approving loans for individuals with less favorable credit profiles. Borrowers in this category often have credit scores below the threshold that lenders consider "prime," making them ineligible for more favorable lending terms.

This type of mortgage can provide opportunities for homeownership to those who might otherwise be unable to obtain financing, albeit at a higher cost. The increase in interest rates serves as a compensatory measure for lenders, covering potential losses that may arise from borrower defaults associated with lower credit scores. Consequently, B effectively captures the essential characteristics of a subprime mortgage, distinguishing it from other types of mortgages that cater to borrowers with better credit standings or are structured for specific programs.