Types of Mortgages
When you have a "regular" job with a steady salary and good credit, odds are you can qualify for a traditional mortgage. These types of loans typically require a down payment of 20% (although we know of plenty of traditional mortgages that require less), and have buyers pay the same amount of money each month over the life of the loan. When you've finished making all the payments, you own the house.
Business owners and the self-employed, however, rarely do well with these loans. When you can't guarantee the same amount of money coming in each month, it's hard to convince a bank that you'll make on-time monthly payments. In fact, the rate of default for self-employed persons for traditional mortgages is nearly double the rate of default for professionals with salaried jobs. Keep in mind, this statistic is for people who have managed to qualify for a traditional mortgage. Most business owners we know put that 20% down payment into their business instead of their house, then pick a mortgage product that is a lot riskier than a traditional mortgage. That means their default rate is even higher.
Fortunately, there are plenty of ways to get a mortgage if you don't qualify for a traditional loan. The options on this page are being offered by banks, but it can be a trick to get a representative to tell you about them. That's why we want to stress that you learn everything you can about these non-traditional options before agreeing to them. Many of these choices have been used by business owners for decades, but they have risks that traditional mortgages don't have.
Balloon Payment Mortgages
These loans were originally designed for commercial and industrial clients, but the past few years have seen them making their way to the consumer market. Instead of a traditional mortgage in which the borrower pays something every month, these loans don't require any monthly payments. In lieu of this, the borrower and lender make an agreement that the borrower will pay a designated amount at the end of a specified period of time.
For example, assume a person wants to buy a commercial building for a business for $500,000. He or she will probably want to keep their costs as low as possible during the first few years, so they agree to a balloon mortgage with a five year term. At the end of five years, the borrower might agree to pay the bank $600,000. It's the business owner's responsibility to figure out how to come up with the money at this time, or the building is foreclosed on by the bank.
In the business world, these loans rarely end in foreclosure. Most commonly, the business owner pays back a portion of the balloon payment, then refinances the rest of the debt into another mortgage. This makes sense for a new business or one that is looking to expand; they get a "free" building while they're growing, then they have to pay off the debt after they are established.
Balloon mortgages for private individuals are much riskier. Typically, a person does not look to buy a home before they are financially established. In fact, balloon mortgages for residential property have high default rates. They are usually taken out by people who want to own a house while they are getting a business established, then discover that the profit from the business is not enough to cover the balloon payment. Individuals tend to have a lot fewer choices when refinancing than a business, so these loans tend to end up in default.
There are very few banks who will offer balloon mortgages in their purest form to individuals for a private residence because of their high default rates. Instead, banks prefer to pair them with an interest-only loan. The homeowner would pay the interest on the loan every month, then be responsible for the principal balance at the end of the loan. This allows the bank to make a profit, even though they know that the end result will most likely be foreclosure on the property.