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In this modern economy, lenders provide loans tailored to just about any situation. Balloon loans are one such loan, but carry a serious downside if youre not careful.
Balloon Loans
A balloon loan has nothing to do with hot air or floating around the world in 80 days. Fail to plan very carefully when using one of these loans, however, and your financial world will definitely go down in flame like the Hindenburg.
A balloon loan is a mortgage with a fixed interest rate for a set period of years. Unlike traditional fixed rate home loans, the interest rates on balloon loans are nearly as low as those found on adjustable rate mortgages. The problem with balloon loans, however, is the term.
While balloon loans provide a low fixed interest rate for a set period of years, those years are not in abundance. Instead of a fifteen or thirty year repayment term, a balloon loan typically has a term of seven to ten years, depending upon what the lender was willing to give you. At the end of the term, you must repay the balloon loan in full. Yes, in full. Lets take a look at how this can play out.
In 2005, you find a home you love but cant qualify for a loan. You are so engrossed with the loan that you eventually locate a lender willing to write you a balloon loan. The loan is for 400,000 and has a 7 year term. At the end of the seven years, youve paid the loan down by 50,000, but still owe 350,000. Somehow and someway, you must come up with that 350,000 to pay off the loan. If you dont, the lender will foreclose on the home.
Every borrower that goes with a balloon loan fully intends to refinance the property before the balloon blows. While this makes sense, you have to keep in mind that refinancing is no sure thing. Maybe you can, but maybe you cant. Also, we are experiencing some of the lowest loan rates every seen. Chances are very strong that in seven years, rates are going to be much higher. Are you really going to be able to afford those rates?
Balloon home loans are all about seeing the future. In essence, you are pulling out the tea leaves and betting on rates in 2012 or so. If you get it wrong, your financial life can become a nightmare.
Bad Credit Home Loan Mortgage Services – Selecting A Good Mortgage Broker
If attempting to get a bad credit mortgage, using a mortgage broker is wise. Some people contact traditional lenders when applying for a home loan. However, if your credit is less than perfect, these lenders may be unable to assist you. On the other hand, some traditional mortgage lenders have begun offering bad credit mortgages. Still, for a wide selection of lenders, a mortgage broker is the way to go.
Who Are Mortgage Brokers?
When choosing a good mortgage, brokers operate as the middleman. It is important to compare lender offers before accepting a mortgage. Unfortunately, many homebuyers skip this step. Comparing lenders is tedious and time consuming. Thus, those in a rush to purchase a home make the mistake of submitting one loan application and accepting the first offer.
Smart homebuyers realize that comparing lenders may save them thousands of pounds. If using a broker, you do not have to contact each individual mortgage lender. Rather, the mortgage broker will do this for you. Moreover, brokers manage much of the paperwork, which makes the process easier.
Reasons to Use a Mortgage Broker for a Bad Credit Mortgage
Each homebuyer has a different situation. Hence, there are different loan programs to accommodate each borrower. For example, some lenders specialize in loans for people with poor credit, no credit, foreclosure, bankruptcy, and so forth. Additionally, there are loan programs designed to offer down payment or closing costs assistance.
Mortgage brokers have access to various lenders and loan programs. Therefore, they are able to locate the best loan package. Because brokers work with many lenders, they obtain multiple quotes for you. By doing so, you are able to easily compare a lenders offer and terms.
Choosing a Good Mortgage Broker
It is important to choose a mortgage broker with a good reputation. Although some brokerage companies advertise heavily, this does not necessarily guarantee good service. Instead, get referrals from family, friends, acquaintances, etc.
If using a local broker, contact the Better Business Bureau to make sure a particular broker does not have any complaints. Similarly, if using an online mortgage broker, search online rip off reports for complaints. Another way to find a good broker is to consult a listing of recommended mortgage brokers.
Bad Credit Home Financing – Choosing A Subprime Mortgage Lender
In the early nineties subprime mortgages accounted for about five percent of all mortgages. Today the subprime mortgage loan sector comprises more than twenty percent of the mortgage market. With this explosion of subprime mortgage lenders and brokers, it is important to know what to look for when choosing your lender. Not only do you want to be sure that you are getting the best deal possible for your subprime mortgage, you also want to know how to avoid falling prey to a predatory lender.
What makes a person a candidate for a subprime mortgage? Bad credit is the predominant reason but there are others. Fluctuating income and even the type of property being purchased can also necessitate an unconventional mortgage. If your unique situation requires a subprime mortgage do the following when choosing your loan agent or broker.
Know your credit history, particularly your FICO score. A score lower than 620 generally means that you will be offered a subprime mortgage. Do not take for granted that you must seek a subprime mortgage. Ask what products are available for you. Also, make sure you have your employment, income and payment histories readily available.
Do not assume that getting the lowest interest rate also means you are getting the best loan. Most subprime mortgage loans will be two percentage points higher than a conventional loan and may have additional fees. All of the prospective subprime mortgage lenders should submit their loan packages to you in writing. Take the time to carefully analyze all of the mortgage offers. Compare not just the interest rates but also the fees you are being charged.
Be wary of prepayment penalties. A subprime mortgage is a vehicle for repairing your credit or responding to a specific applicant situation and usually is a short term solution. Hefty prepayment penalties may lock you into a subprime mortgage for a longer term than is necessary or cause you to pay a substantial price for refinancing to a conventional mortgage at a later date. You may have to accept some sort of prepayment penalty but negotiate with the various lenders to guarantee you have the least burdensome penalty possible.
Even though you are looking for a subprime mortgage lender you still have many options. After comparing the loan offers from the different lenders, negotiate the terms. Do not feel that a lender is doing you a favor by offering you a subprime mortgage. Many times the compensation a lender receives for a subprime mortgage is greater than that which is received for a conventional mortgage.
Most subprime mortgage lenders are honest and responsible business people. Still, the regulation of subprime loans varies widely and you should be careful not to fall victim to a predatory lender.
1. Dont respond to telephone or direct mail offers from subprime mortgage lenders. Do your own research. The Better Business Bureau, the telephone book and the Internet are all good resources. Ask friends for referrals.
2. Dont allow yourself to be pressured. Ask for offers in writing and use plenty of time to compare them.
3. Dont sign any documents that have blank spaces or incorrect dates.
4. Dont be convinced to inflate your income or net worth.
5. Dont skip reading any portion of your loan documents because your lender tells you that part isnt important.
Choosing a subprime mortgage lender is like any other purchase. The more knowledge you have and the more research and analysis you do, the better your decision will be.
House hunting can be an exhilarating process as you try to pick that perfect property. Applying for a mortgage isnt nearly as much fun. Following is an overview of how the mortgage industry works.
An Overview of the Mortgage Process
You have a nice chunk of money saved away for a down payment. You have started shopping for a home or have found the perfect property. It is time to enter the world of financing, better known as getting a mortgage. Before entering the labyrinth, it might help to get an overview of how the mortgage process works.
A mortgage simply is a debt instrument that acts to secure a cash loan to you on a home. In exchange for giving you the money, the lender puts a first lien on the prospective home for loan amount. If you default, the lender can foreclose and sell the home to recover the debt amount.
In mortgage industry terms, applying for a mortgage is known as originating a loan. To originate the loan, you will first have to find a lender you are comfortable with. You may have a close relationship with a bank that will suffice. Many will find it advisable to use a mortgage broker to shop for the loan that best meets their needs. Different lenders offer different loans and terms.
As part of the origination process, you will fill out a lengthy loan application. Depending on the nature of the loan, you probably will also be required to submit documentation supporting your claims of income and so on. There are no document or partial document loan applications, but most people dont qualify for them. Once your application is submitted, a lender inevitably will ask for more information or documentation. Depending on how the review, known as underwriting, goes, the lender may decline or accept your application. Often, the lender will add a stipulation to the loan that cover issues it is concerned about.
Once you are granted the loan, you will close on the residence you are after. Most people are then very surprised by what happens. Inevitably, your mortgage lender will sell the loan to another entity. To raise cash to issue more home loans, lenders sell their current stock of mortgages on a secondary market. Your lender may continue to handle the administration of the loan, but will often just hand the entire thing off.
Your mortgage will be terminated at some point in time. Positive reasons can be the sale of the home, refinancing or simply paying off the balance. Negative reasons can include default or bankruptcy. Regardless, the above represents the basic structure of the mortgage industry and how your loan moves through it.