What are the risks of "b" and "c" loans?

The major risk is the cost of the loan. Desperate home buyers who are not selective when seeking an "A-," "B," "C" or "D" loan may find themselves locked into long-term loans with outrageous fees and interest rates. "Watch out how costly they are," said Jon Riccardi, a mortgage broker with MPR Financial in Albany, Calif. "Some of the quotes are a little difficult to quote."
Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who were rejected often turn to mortgage brokers and specialized mortgage lending businesses.  Alternative lending sources not only offer a variety of loan products but also are more willing to deal with higher debt-to-income ratios, credit problems and other black marks on an individual's record.
In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent. The borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime. Many home buyers engaged in this process look at these less desirable loans as a penalty while others are grateful for a second chance. Yet no one should be so anxious that they sign for a loan with questionable terms. "The goal of these loans is to pay them off quickly," Riccardi said. "What I've seen is, people don't investigate these loans enough and when they try to get out of it, realize what they got into."
Resource: "How to Shop For a Mortgage," a brochure available from the Mortgage Bankers Association of America, 1125 15th St., N.W., Washington, DC 20005.