Mortgages: Getting 100% Financing

Overview of No-Money Down Mortgage Loans
Jim and Jane, a newly married couple, are interested in finding a mortgage loan program to buy a home for themselves. However, both have only recently started earning wages and are not in a position to use savings for the down payment required for traditional mortgage financing. Does it mean that their dream of owning a house on prime property will never see the light of the day? Well, a ‘100% Mortgage Program ’ and their credit rating could be the key that could unlock the door to financing their first home in the normal 30-year term.

30-Year rates are at recent lows. Adjustable Rates (ARM) are even lower. See if You Qualify.

photo of home financed with 100% mortgageThe Oxford dictionary defines mortgage as a legal agreement by which a person takes out a loan using as security real property (usually a house which is being purchased). Typically, in a mortgage, the banker does not make a loan for the entire amount of a home sale price. Instead, the borrower is asked to pay a certain percentage of the mortgage amount in the form of a down payment. This lends added protection to the mortgage banker. (Other costs, like Private Mortgage Insurance, or PMI, may apply)

However, 100% mortgage loan programs allows the borrowers to get the entire amount of the loan, even if it does cost more in interest in the long run. There is no need to make any down payment. The entire loan is made for your use against the full sale price of the home.

Different Types of 100% Mortgages
There are various types of 100 % mortgages to apply for; the 103% mortgage allows the borrower to cover the cost of closing on the property, whereas the 107% mortgage loan also gives the borrower a chance to finance for furnishings and repairs.

Anyone opting for a 100% mortgage has to remember that they will have to pay a few extra dollars to apply for and secure this type of loan. 100% mortgages carry a higher interest rate than the traditional or loan-to-value kind of mortgages. Most bankers also charge extra closing fees such as Higher Lending Charge [HLC] when disbursing 100% mortgages. Remember, this is debt for the long term! These should be discussed when making application, as well as discussing the market rate of interest.

A 100% mortgage should be considered as a mortgage loan by those who find it difficult to pay the 10% down payment, which is the normal rate, asked by traditional mortgage bankers for a fixed term loan. If you take a mortgage for $50,000, you will have to pay $5000 as down payment. With ever-increasing real estate prices, the mortgage amount also increases leading to a corresponding increase in the down payment amount, as well as a higher monthly payment (consisting of PITI, principal, interest, property taxes, and property insurance). A person opting for a 100% mortgage financing allows the chance to forego the down payment.

There are many financial advantages associated with 100% mortgages. Since real estate prices are escalating, it makes sense to purchase a home now. A 100% mortgage allows for the purchase of one’s dream house or property without worrying about collecting the necessary finances for the mandatory deposit. Some mortgage lenders that lend 100% on real property also allow for the payment of stamp duties, and other such costs associated with the purchase of a house. One can also go for shopping for house furnishings, etc., with the mortgage cash.

However, 100% mortgages have some pitfalls. One of the more serious pitfalls is the risk of the borrower going into a position of “negative equity”. This comes about when the price or value of the home purchased declines after the purchase.  In this situation, the lending bank could request additional money from you to make up for the shortfall, as the mortgage amount taken by you for the house would have become more than its current market value. 

Risks of Loan Programs that lend 100%
Since 100% mortgages do not require any down payment, in order to qualify, the borrower is required to show proof of ownership of securities like stock shares, savings plans, pensions, mutual funds, etc. Lending banks specifically require that the market value of the securities should be more than the mortgage amount. If the home value falls below the amount agreed in the mortgage deed, the bank would have the right to:

  1. Force the borrowers to sell off the securities to meet the debt. May also negatively affect their credit score or credit ranking.
  2. Sell the securities to meet the debt without notifying the borrower.
  3. Sell any securities they deem fit. This means that the borrower does not have any say in the securities sold. The banks may choose to sell a mutual fund; share of a particular company or any other security that they feel should be sold for meeting the stated amount.

It should also be noted that in situations of negative equity no loans, the borrower is not entitled to extend the time to meet the bank’s collateral call.

An additional risk that should be noted is that in the event the borrower defaults in making the stated monthly payments of the mortgage loan, the lending bank has the right to sell off both the house/property as well as the securities entrusted by the borrower to recoup the mortgage amount.

Anyone interested in applying for a 100% mortgage should consider visiting different mortgage banks and mortgage lenders in order to locate the best possible deal on a home loan. Prospective customers should ask the banks and mortgage brokers to explain the pros and cons of 100% mortgages or low down payment loans (including the interest rates) in detail. Customers should carefully go though the mortgage deed and get a good grasp of the policies regarding the bank’s right to call the mortgage in case of default. Also, customers should not pledge any single type of security; instead, it’s best to aim for diversification in establishing the necessary collateral. For example, instead of pledging only stock shares, a borrower should try to include cash, mutual funds, etc. This strategy would ensure that the value of all the securities does not increase and decrease at the same time.

In closing, a 100% mortgage can be the right mortgage for prospective borrowers who first carefully analyze the advantages and disadvantages associated with this type of loan. Once the risks are clearly factored and understood, the opportunity that this type of mortgage provides could be the key for Jim and Jane, our newly married couple, to obtain the financing to make that important first house purchase.

TBMR, LLP ©2006