100% Financing Mortgages

100% finance mortgages are mortgages with zero money down required at the time of the initial loan. The main advantage of this type of loan is the ability to buy a home with almost no money down. Providing 100% financing of the purchase price of your home, this mortgage is specifically designed for homebuyers who have limited available cash, but excellent credit.

100% financing offers complete financing of your property. The other option, 80/20, finances your mortgage with two loans. If you have a strong credit profile but have limited funds to commit to a down payment, then an 80/20 mortgage is just right for you. Lenders typically require a down payment of at least 20 percent of the purchase price. If the loan amount is for more than 80 percent of the purchase price, PMI is usually required. You can avoid paying PMI by getting a second mortgage ('piggyback loan') to back up your first mortgage.

The first mortgage is provided for 80 percent of the cost of the home and the 'piggyback' second mortgage is for the remaining 20 percent. The 80 percent first mortgage can be a fixed-rate (15-year or 30-year), adjustable-rate (usually 5/1, 7/1 or 10/1 fixed period ARM) or interest-only loan. The 20 percent second mortgage can be a home equity line of credit that changes with the prime rate. Combined, the two loans allow you to purchase 100% of your home with no money down. Both loans may be carried by your lender, but sometimes the seller or a second lender is required to carry the 20% mortgage.

Each lender has their own criteria for deciding who will meet the required qualifications for a zero-down loan. Most sub-prime lenders require any bankruptcies or foreclosures to have been at least twelve months ago. A conventional loan requires these to be discharged for two to four years ago.

While a credit score of 600 or higher is best, large cash reserves can also qualify you. Six to twelve month’s worth of cash reserves in the form of savings, money market, or other liquid assets are considered ideal.

If you choose 80/20 financing with the seller carrying the second mortgage, you can qualify with sub-prime lenders with a score of 560.

You will also want to decide what type of mortgage you want. An ARM is easier to qualify for and has lower rates. A fixed rate mortgage offers the safety of a constant interest rate over the life of your loan.

Typically an ARM will be a better deal if you plan to refinance within a couple of years. After you have improved your credit history, you can refinance for a conventional mortgage with low interest rates.

The two main benefits of 100% financing are: constant monthly payments - with a fixed rate mortgage, your monthly principal and interest payments stay the same throughout the life of your loan, so you are protected against any unexpected interest rate increases; frees up cash - existing funds can be used for closing costs or other needs, rather than a home down payment.

Technorati Tags: Mortgages, Financing