What You Need to Know About 100% Mortgage Loans

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.