Now that mortgage lenders have decided to tighten the loan requirements for mortgages, many people will find it difficult to acquire financing. However, if you’re able to qualify for a home loan, and you need a program that offers 100% financing, it is important to understand how these loans works, and then determine whether this type of mortgage is right for you.
What is 100% Financing?
Simply put, a mortgage loan that offers 100% financing does not require a down payment. Even so, the borrower is still responsible for paying the closing costs and other mortgage-related fees such as appraisal fee, home inspection fee, etc. Thus, it is vital for a potential homebuyer to have cash on-hand for these expenses. In many instances, homebuyers do not have money for closing costs. To assist with this extra expense, a few prime and sub prime lenders offer 103% or 104% home loans. The money can be used for settlement costs, or put toward home improvements or renovations.
Drawback to Zero Down Home Loans
While a no money down home loan makes it possible for a person with little cash savings to qualify for a home purchase, these types of mortgages have a downside.
1. Higher Interest Rates
Individuals who apply for and accept a no money down home loan can anticipate a higher interest rate. Rate differences are typically small, and concern few borrowers. However, a one-percent interest rate increase can affect affordability. If you want to keep mortgage payments low, try and get the best rate on the loan. While the typical 20% down payment can be difficult to manage, make an effort to save enough money for at least a 3% down payment.
2. Stricter Credit Requirements
At one time, persons with so-so credit could get approved for a home loan with no money down. Unfortunately, many mortgage lenders have tightened the lending requirements, which make it harder for individuals with bad credit, bankruptcy, and foreclosure to qualify for a home loan. If you plan to buy a home in the near future, and need a no money down loan, make sure that your credit is in tip-top shape. Pay creditors on time, never skip a payment, and lower your debts.
3. Private Mortgage Insurance
If you have a no money down loan, you also have private mortgage insurance or PMI. PMI protects the mortgage lender in case of default, and is a requirement on all 100% financing home loans. The disadvantage of private mortgage insurance is that it can increase your monthly payments by as much as $150. On a more positive note, PMI is temporary and disappears once your property acquires 20% equity.