Taking a loan to buy anything comes with its share of risks, and those risks become even more significant when it comes to big-ticket items like a house. What are these risks that you should be aware of? If you are thinking of taking a loan to buy your home and are worried about the risks, read on.
Risks of Buying a House With a Loan
When it comes to taking a home loan, there is more than just the amount borrowed and the repayment period that you need to keep in mind. You could directly communicate with the lender or engage a mortgage broker or agent.
Real estate experts can provide you with a customized solution! If you need the right kind of advice for buying a property in San Francisco, get in touch with San Francisco real estate agents.
Here are the critical risks associated with mortgages:
Considering the impact a housing loan will have on your present and future lifestyle, you need to know what your budget is going to be. Will you be able to pay the recurring mortgage liability through the long term comfortably? These recurring payments need to made before the due date.
You need to check whether your emergency fund will be affected or not and whether it will upset the funds you have set aside for your other financial goals. This impact is also based on location. If you buy San Francisco luxury homes the impact is different from buying in any other part of the country.
Before going in for a mortgage, take the following factors into account:
- Your current and future financial situation
- The duration of the mortgage
- Are there any other liabilities you are considering like a car loan or educational loan?
- The interest rates being offered and the current economic situation
- The fall or increase in the value of your house over time
- The possibility of your mortgage payments going up over time
- Fluctuations in your income
Future Career Prospects
There are no guarantees when it comes to your financial situation, and it may change any minute. You need to take into consideration the worst-case scenario where your income might fall, and your expenses, including mortgage payments go up. You could face a crisis, especially if you are a seasonal worker.
Factors which could impact your current earnings are:
- Life-stage changes like getting married, having children or hiring caregivers for an elderly family member
- Losing your job or getting into debt
- Commission or incentive-linked jobs
- Divorce or separation
- Loss of a family member
Before going in for a home loan, find out the other sources of income you can tap and what your current disposable income is. You need to plan your payments.
Here is what you need to do:
- Prepare a comprehensive household budget
- Create an emergency fund for mortgage payments for six months
- Determine the various payment options in your mortgage contract
- Find out the insurance products to cover you in case of illness, injury or disability
- Get information regarding tax credits
- See if your agent or broker can offer you a better deal
- Be aware of any government benefits you could get
- Have access to a professional team comprising your financial adviser, mortgage provider, property agent, and accountant.
What’s Your Credit History?
A good credit history means favorable terms and conditions of lending, including mortgage rates, amount, and loan-repayment tenure. Getting a credit report is not complicated, and there are a lot of credit-reporting agencies that will provide you with an accurate credit report for a small fee.
When going for a house loan, you need to consider the other costs associated with it. You need to factor in closing costs that comprise home inspection and legal fees, cost of appraisals, and taxes for land transfer.
Some costs arise after you become the owner. These are expenses associated with moving, home repairs, condo fees, insurance, and property taxes. When calculating the cost of your mortgage, these costs need to be considered.
Impact on Other Financial Goals
Like any other individual, you need to consider your other financial goals in life like retirement, higher education for children, emergency funds, car loans, having a child, and foreign travel before you go in for a mortgage.
You should go in for a mortgage if it does not impact the funds you have set aside for the above goals.
Understanding the Contract Terms
Your house loan contract will have a lot of legal jargon and clauses. It would be best if you had complete clarity regarding all the terms and conditions mentioned in the agreement before you sign on the dotted line.
Make sure you read the contract and get your doubts clarified. A better option would be to get a legal professional to go through the agreement. Even though mortgage brokers should inform you of the material risks in a housing loan contract, you should play it safe.
Penalties for Non-Payment of Obligations
There are some severe consequences in the event you are unable to pay your housing loan obligations on time. These would include penalties, foreclosure, or default.
Here are some of the penalties for failing to pay your mortgage obligations:
- Delayed payment fees
- Your credit rating will take a hit. This will result in difficulty in obtaining loans or making individual purchases.
- The mortgage lender uses the Power of Sale clause, selling your property to realize your dues. If the price realized for your home is more than what is remaining as part of the mortgage, the excess will be paid to you. If there is a shortfall, you may have to cover it.
- The other option open to the mortgage lender is a foreclosure. This will prove very costly for you since all the mortgage payments made by you, all costs incurred by you for making any home improvements, and any premium that your home might get in the market is lost.
Fluctuation in Property Valuations
While a home might be an excellent long term investment, the value might fluctuate, resulting in higher or lower costs due to specific economic cycles. This would result in lower valuations for your asset.
Take an Informed Decision for Optimal Solutions
A home loan is a significant financial decision, and it has a massive impact on your financial commitments towards other financial goals. Going ahead with a house loan without proper planning could land you in a crisis.
You need to plan your finances for your house loan by making a proper assessment of your current and future financial situation. You need to prepare budgets, consider alternative income sources, compare mortgage options by consulting mortgage brokers, and then make the decision.