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What are High-Risk Mortgages?

Many people think that in order to get a mortgage in Canada, you must have a great credit score, and generally this is true. However, there is a certain type of mortgage, called a high-risk mortgage, that allows people even with blemished credit to still become a homeowner in Canada. So when your credit score is too low for a traditional mortgage, how can you apply for a high-risk mortgage? And more importantly, should you?

Applying for a high-risk mortgage is just as easy as applying for a conventional mortgage, but being approved for one may not be as easy. Because individuals with low credit scores are seen as being a bigger risk and more likely to default on the loan, lenders generally don’t want to offer them a mortgage. It’s true that when any borrower defaults on a loan, be it a high risk borrower or otherwise, the lender can then seize the property and take back control of it. Once they do, the home will be known as being foreclosed and the bank or lender can then sell the property to another party. However, doing so costs the lender a great deal of money in legal expenses and the property may not even raise enough money to cover the losses they suffered through the default of the loan. Also, most lenders don’t want to deal with the hassle and headache of having to resell a property.

So, should you take on a high-risk mortgage when your credit score isn’t high enough for a traditional loan?

That depends. Many people with low credit scores are still in a good financial position to cover the cost of a home loan; they just don’t have the credit score to prove it. These individuals might have more than enough income to cover the costs of a mortgage but have difficulty being approved due to their credit. In this case,a high-risk mortgage could make a lot of sense and give an individual the chance to achieve the dream of being a homeowner. These individuals should speak with an Ottawa mortgage broker to help them find a lender that specializes in high-risk mortgages.

However, individuals need to take a good look at their monthly income and determine if they really can make those payments. They also need to look at why they have a bad credit score. Is it because they were once in bad standing, have now paid off their loans, but just haven’t gotten their credit back up to par? Or is it because they are so far in debt that their credit has been sunk because of it? If this latter case is true, it may not be a great idea to get a high-risk mortgage because those debts, along with a mortgage payment, will still need to be paid. And that might just not be possible.

Anyone who’s thinking of taking on a high-risk mortgage needs to understand that these types of home loans come with much higher interest rates as well as higher fees. This is to help cover the lender’s cost in case the homeowner defaults on the loan. This is another area where an Ottawa mortgage broker can help find you the best deal with the lowest interest and fees.

High-risk mortgages can be just the answer for many homeowners. But if you’re interested, you must take a careful look at your credit score and your financial positioning before you embark on one. Foreclosure on a home is one of the worst things to ever go on your credit report, and it could hinder your chances of getting another mortgage for many, many years to come.

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