Subprime loans are loans made to consumers who have low credit scores, such as the Fair Isaac Corporation (FICO) credit scores. Fair Isaac has traditionally classified any loan made to a borrower with a FICO credit score of less than 630 as subprime. But every bank may have a different definition of “subprime” and the classification may change by loan type. The same borrower’s loan may be classified as prime for a fixed mortgage with full income documentation and a large down payment, but subprime for an interest-only loan without full income documentation.

The 2/28 ARM (adjustable rate mortgage) is a common type of subprime loan whereby the interest rate is fixed for two years, and then the ARM is reset to equal the value of the current rate index, plus a margin. The rates will often rise quickly, due to the high margins.

Interest rates are higher on subprime loans than prime loans and prime loans are much easier to obtain than subprime loans. That is why it is important for a borrower to do everything they can to raise their credit score above 630. For additional information, see the Fair Isaac Corporation, the Equal Credit Opportunity Act and AnnualCreditReport.com.