Loan Officer Practice Exam

What is a characteristic of a subprime mortgage?

1. Lower interest rates

2. Higher loan amounts

3. Higher likelihood of default

4. Insured by the government

The correct answer is: Higher likelihood of default

A characteristic of a subprime mortgage is the higher likelihood of default. Subprime mortgages are designed for borrowers who have lower credit scores and a higher risk of failing to repay the loan. These individuals may have a history of missed payments or other credit issues, making them less attractive to lenders. Consequently, lenders charge higher interest rates to compensate for the increased risk associated with these loans. Unlike prime borrowers, who tend to have solid credit histories and are more likely to fulfill their loan obligations, subprime borrowers may struggle to make consistent payments. This higher likelihood of default is a crucial consideration for both lenders and borrowers when engaging in subprime lending, as it places added scrutiny on the terms of the loan and the financial capabilities of the borrower. In contrast, lower interest rates, higher loan amounts, and government insurance are typically associated with prime mortgages or other types of loans aimed at more creditworthy borrowers rather than subprime mortgages.