When a lender considers you for a home loan, your FICO score, loan-to-value ratio and many other factors are taken into consideration. When a low credit score is combined with a low down payment (which means a high loan-to-value ratio), the result is what is known as a subprime loan. Subprime mortgages are riskier to lenders, so they have higher interest rates.
Before the recession, borrowers could obtain subprime mortgages easily, even with a FICO credit score as low as 580 with 100 financing. Today, it is harder to qualify for a subprime loan, but not impossible. As the economy has improved lenders have slowly made subprime home loans more accessible, and lowered the minimum credit score required to around 620 to 640.
You can expect a higher interest rate with a subprime loan to make up for the higher risk of the loan and your subprime credit score. There are several types of subprime loans you may qualify for, depending on your credit and debt-to-income ratio. The most common type, however, is the adjustable rate mortgage. Remember that an ARM will usually have a lower interest rate and payment at first than a fixed-rate mortgage, but the rate will adjust and most likely cause your payments to go up, as interest rates are already near historic lows and they are not going lower.
What to keep in mind before getting a subprime loan:
Subprime lenders are learning that many consumers who have gone through a rough time, including foreclosure or bankruptcy, were once responsible homeowners and good credit risks. More lenders are now offering home loans with better terms to these consumers who are trying to recover from credit problems.