What is a High-Risk Mortgage?
A high-risk mortgage is a home loan that is taken out by a person with a low credit score, or bad credit. When people have bad credit it’s usually because they’ve defaulted on loans in the past or haven’t paid their bills on time. When lenders look at that, they believe that you have a greater chance of defaulting on a mortgage than someone who has good credit. Because of this, in many instances some lenders won’t even consider lending to someone who has a bad credit score, because they’re simply too large a risk.
There are however, many mortgage brokers and lenders that specialize in high-risk mortgages and giving home loans to people with bad credit. A high-risk mortgage can be very profitable for lenders because they can often carry extra fees, and they’ll always carry a much higher interest rate than conventional mortgages. Lenders will charge a higher interest rate on high-risk mortgages simply because they are taking on a higher risk, and need some reassurance that you’ll be able to pay it. High-risk mortgages are also more difficult to obtain than other mortgages, and so lenders who offer them are able to at rates that are a bit higher.
If you have bad credit and take on a high-risk mortgage to help you achieve the dream of home ownership, it doesn’t necessarily mean that you need to carry that high-interest mortgage for the lifetime of the loan. As you pay your monthly mortgage payments on time, you’ll continue to show that you can and will make payments, and you’ll also improve your credit score. Once your credit score reaches a certain number, that’s much higher than when you initially applied for the mortgage, you can then refinance at a much lower rate and terms that are closer to a conventional mortgage. However, this too can have some downfalls that you should know about before taking on a high-risk mortgage.
High-risk mortgages usually carry pretty hefty pre-payment fees, fees that you’ll be charged should you choose to pay off your high-risk mortgage early. These fees while not always, can sometimes come even if you’re not paying off your mortgage entirely but are refinancing to receive a better rate or a better term.
Private lenders are often some of the most common lenders that offer high-risk mortgages. A private mortgage is just that – a mortgage that is loaned by a private company or individual instead of a traditional bank or other lending institution. While private lenders can be just the answer for individuals with bad credit that would still like to own a home, they can be difficult to find. Working with a mortgage broker, who has access to hundreds of different lenders, including private lenders, will give you the best chance of finding a private lender offering high-risk mortgages.
Bryan J is the author of this article. For more information about high risk mortgage lenders Ontario and Second mortgage loans please visit canadianmortgagesinc.ca
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