Requirements for mortgage financing are relatively strict. People have to meet minimum income levels based on the amount of financing they require. Lenders also look at their overall assets and their debt-to-income ratio.
In some cases, people who are close to qualifying but unable to secure a traditional 30-year mortgage may look into different types of mortgages. Adjustable-rate mortgages and balloon mortgages are sometimes more accessible to those with limited verifiable income or compromised credit scores. However, these mortgages come with real risks.
Changing rate issues
An adjustable-rate mortgage may have unpredictable future payments. When interest rates fluctuate, homeowners may see their payments change substantially with limited prior warning. They may then struggle to make payments and may be at the mercy of the markets until rates come back down.
The challenges of a balloon mortgage
Balloon mortgages often have a fixed rate and offer very accessible introductory payments. However, the issue comes at the end of the repayment cycle. There is a large final balloon payment that may be tens of thousands of dollars or possibly more due at the end of the mortgage term.
Property owners may struggle to refinance the remaining amount owed when they have a balloon payment coming due, especially if they have not addressed the income or credit issues that prevented them from securing a traditional mortgage initially. Aspiring buyers and agents assisting buyers who are close to qualifying but not quite able to do so may need help evaluating their options.
Discussing different types of mortgages, and possibly alternative strategies for homeownership, with a skilled legal team can be helpful for those who struggle to qualify for traditional mortgages. A lawyer’s insight can help people protect themselves during residential real estate transactions.