A mortgage is a loan used to finance the purchase of a home, land or other real estate investment. When you get a mortgage, you agree to pay the lender back in consistent installments and your lender has an interest in the property until the loan is fully paid back.
To qualify for a traditional mortgage, you must meet certain requirements for a credit score, down payment and income. If you do not meet these requirements for a traditional mortgage, you may still qualify for a high-risk mortgage. While a high-risk mortgage offers potential buyers an opportunity to invest in real estate or purchase a home, there are some drawbacks to keep in mind before agreeing to one. In this blog, we will share everything you need to know about qualifying for a high-risk mortgage and any benefits and drawbacks associated with it.
What is a high-risk mortgage?
A high-risk mortgage is a loan given to a borrower whose credit history, down payment or debt-to-income ratio do not meet the requirements for a traditional mortgage. With a high debt-to-income ratio, bad credit or low down payment, a borrower has a higher chance of defaulting on the loan and the lender assumes a higher risk.
What are the benefits and drawbacks of a high-risk mortgage?
The greatest benefit of a high-risk mortgage is that it could allow you to become a homeowner if you’ve exhausted all your options for securing a mortgage. It can also help you improve your credit in the long run if you keep up with your payments. However, a high-risk mortgage has a few drawbacks that are worth noting.
1. Higher interest rates.
High-risk mortgages often come with higher interest rates and larger monthly payments than traditional mortgages. This means that you will end up paying more in interest over the life of the loan, which can make it harder to pay off the mortgage and can put a strain on your finances.
2. Larger down payment or collateral.
Lenders may require a larger down payment or collateral because of the increased risk of default associated with high-risk loans. You can use other real estate, cash savings, stocks, bonds, or mutual funds as collateral for the mortgage loan.
3. Limited options.
With high-risk mortgages, you may have limited options when it comes to refinancing or selling your home. This can make it harder for you to improve your financial situation or move on to a new home in the future.
Should you take a high-risk mortgage loan? It may be a viable option for some borrowers, but it’s important to carefully consider the risks and benefits before making a decision. Carefully consider whether you can afford the higher interest rates and monthly payments associated with these types of loans. It’s always a good idea to consult with a financial advisor or mortgage professional to help you make an informed decision based on your financial situation. Contact us today to learn how we can help you.