Subprime Mortgage Lending and First-Time Home Buyers

First-time home buyers are often targeted by predatory lenders offering expensive subprime mortgage lending offers. Because a first-time home buyer has no standard of comparison, he or she may be convinced to take a loan that will not work in the long run. Subprime lending may be one option presented to an individual in this situation. While not all subprime loans are predatory, they do present unique risks to first-time buyers that must be assessed before a borrower agrees to the contract.

Benefits

The low initial rate of a subprime loan keeps mortgage payments low in the beginning. The homeowner may believe he or she will be in the home for only a short time, and so the rate will never adjust. It is also possible the borrower feels his or her income will increase in the future. At that point, a more expensive mortgage may be affordable. 

Risks

Despite the best-laid plans, subprime loans often backfire. If the borrower has to stay in the home for an extended period, the home loses value due to market factors or the borrower does not receive an increase in salary as expected, default is likely. The climbing rates of subprime loans lead to much higher default risks than standard loan options.