Americans are relying on their credit cards for more than just the occasional impulse purchase. According to a new study that was just released by Freddie Mac, one-third of low and middle-income consumers are currently using their credit cards to pay basic living expenses. And for many, that will begin the descent into bad credit.

Unfortunately, bad credit is a gift that keeps on giving each and every time you apply for a loan. And a mortgage is no exception. However, you don’t have to be a victim of your credit history when you apply for a mortgage because of something called a subprime loan. These are mortgages made to a borrower with bad credit or little or no credit history who would otherwise be unable to obtain one.

Here’s how they work. A prime or conventional mortgage is considered a grade A risk loan. Therefore, subprime mortgage loans are generally categorized into A–, B, C and D grade risk loans. The individual lender establishes the guidelines that determine the parameters of each grade. However, the basic principle in assigning risk grades is the greater the problems are with your credit history, the higher the risk of delinquency, default and loss, the greater the chance that you will be assigned to the highest risk grades like C and D.

Despite all of this, subprime customers don’t have to settle for the first lender that will provide credit. The increased competition within the subprime market has resulted in putting borrowers more in control of lending process. This control manifests itself in the ability to shop around for the most competitive rates. In addition, technology has given lenders automated underwriting and scoring tools that help in pricing loans and predicting defaults, which increases a lender’s capacity to provide more loans with attractive rates.

By : ABC Loan Guide