What is a High Risk Mortgage?
A high risk mortgage is a mortgage loan that falls outside of the normal scope of risk that lenders are used to. When you are dealing with a high risk mortgage, everything else that has to do with the loan changes. Your lender will have different programs for you and different options within those programs. While many people have heard the term high risk mortgage, they may not be familiar with how they work. Here are a few things to keep in mind with high risk mortgages.
What Makes It High Risk?
When a mortgage is considered high risk, it is typically because of the person that is taking out the loan. Those that do not have good credit scores will typically result in a high risk mortgage being made. If your debt-to-income ratio is too high or you do not make a sufficient income for the loan you are requesting, it could be classified as a high risk mortgage. Stated income loans are also known as high risk loans because there is an inherent risk when you do not document everything during the application process. You are relying on someone to tell the truth when it comes to their income. This usually results in buyers overextending themselves. Any of these conditions could lead to the lender classifying the loan as high risk.
How It Affects You
When your mortgage is classified as high risk, it will affect you in a few different ways. When a bank takes on a high risk mortgage, they expect the rules of investment to apply. When you take on added risk, you want to be compensated for this risk. Therefore, when they take on a high risk mortgage, they will expect you to pay them more money in interest. Sometimes the interest rate can be quite a bit higher than normal as a result.
When you have a higher interest rate on your loan, this will affect you in the long term and short term as well. You will pay a much higher amount of interest over the course of your loan and you will have a higher loan payment in the short term. They will most likely require you to pay a bigger percentage of the loan upfront instead of allowing you to finance the whole thing.
You may also be subjected to different loan programs other than a 30 year fixed rate mortgage. You might have to agree to an interest only loan, balloon loan, or an adjustable rate mortgage in order to qualify. Therefore, the conditions will not always be ideal.
What Leads to High Risk Mortgages
There are a number of reasons that you could fall into the high risk category in the future. If you default on a loan, miss your monthly payments, or max out all of your lines of credit, lenders will tend to look at you as a high risk borrower in the future. Therefore, if you want to take advantage of normal interest rates and programs, you should safe guard your credit as tightly as possible.