100% Financing Loans
More and more Americans are choosing to pay for their home with a 100% financing mortgage, also known as a no down payment or a zero-down mortgage loan. This type of home mortgage frees borrowers from the worry and burden of having to gather and set aside funds for closing costs and a down payment in order to purchase a home. Two kinds of zero down loans are available to consumers:
- 100% financing, or complete financing of the property via a first mortgage exclusively
- 80/20 financing of the home by a first and second mortgage, an option often referred to as a piggyback mortgage
While the first approach is easier for the borrower to handle, not all creditors extend this type of home mortgage. The alternative, known as the 80/20 loan, is more commonplace; however, if the seller is involved, the borrower will have to engage in some negotiation. Sometimes, second creditors or sellers are obligated to carry the 20% or second mortgages. Borrowers will find prominent lending institutions that offer bad credit mortgage loans, which service consumers with scarred credit histories and sometimes incapacitating financial circumstances. Individuals who apply for bad credit mortgage loans can ensure approval by making their current payments in a timely manner and displaying satisfactory income verification.
Although mortgage rates on 100% financing loans are higher, borrowers can expect to reap numerous benefits which include the following:
- No cash is required for down payment
- Stocks and other investments need not be liquidated to purchase the property
- Private mortgage insurance is not required (unlike a conventional loan)
- The greater the amount financed, the higher the tax deduction for the loan interest paid
- The opportunity to use and/or start earning equity in the new home, instead of having it tied up
- The ability to have their money earn interest in a money market fund or savings account
- Diminution of their financial risk and risk-shifting to the lender
- The privilege to qualify for a bigger mortgage
Lenders follow individual criteria when assessing a consumer's eligibility for a 100% financing mortgage. It is the borrowers' ability to meet their monthly payments, rather than the size of the down payment that they have saved, that determines the loan amount for which they qualify. Typically, the eligibility requirements for zero-down loans are as follows:
- The property must be occupied by the owner.
- A minimum credit score (FICO) OF 600 is required. Alternatively, borrowers can qualify if they hold large cash reserves (ideally 6-12 months' worth), by way of money market, savings or other liquid assets. Also, sub-prime lenders will qualify 80/20 home mortgage applicants with a score of 560.
- The debt ratio must not exceed 45.
- Any foreclosure or bankruptcy must be at least one year old. This is in contrast to conventional loans, which require foreclosures or bankruptcies to have been discharged two to four years ago
Borrowers must then decide whether to apply for an adjustable rate mortgage (ARM) or a fixed rate mortgage. Eligibility requirements for the former are easier to satisfy, and an ARM offers lower mortgage rates. For consumers planning to refinance within a few years will find the ARM to be a more optimal choice and better deal. Once they ameliorate their credit rating, ARM borrowers can then refinance for a traditional mortgage featuring low interest rates. Conversely, a fixed rate mortgage provides the security of a steady interest rate throughout the loan's term.
Both subprime and traditional lenders offer the 100% financing mortgage. In view of the fact that mortgage rates and terms vary from one creditor to the next, borrowers should obtain quotes from as many zero-down mortgage creditors as possible to ensure they get the best home loan rate.
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