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11. Dice with Debt > Cheaper Cuts of Mortgage

Cheaper Cuts of Mortgage

Prime mortgages in the United States, eligible for purchase and securitization by GSEs, conform to fixed guidelines covering the maximum loan amount (until 2008, around $417,000 for a single family home), maximum loan-to-value (LVR) ratios, debt-to-income limits, and documentation requirements. Subprime loans are given to less creditworthy borrowers, unable to qualify for conforming mortgages because of their lower income or uncertain employment histories. Most have damaged credit histories due to late payment of debts or financial problems arising from business failures, illness, or divorce. Some borrowers are subprime because of a lack of credit history—they have never borrowed.

In assessing risk, lenders rely on automated credit scores, a numerical measure of the creditworthiness of a person based on personal data, financial information, and credit history. The most common measure is the FICO score, named after the Fair Isaacs Corporation, which ranges between 300 and 850. In the United States, the median score is 720, with most borrowers scoring between 650 and 800. Borrowers with scores above 620 conform to GSE guidelines. Subprime borrowers typically scored between 500 and 620.


  

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