A 100% Mortgage Loan - Explained

A 100% mortgage is a type of loan where the lender pays your closing costs and loans up 100% of the value of the home you are buying. This is a non-conforming loan because you don’t need to put any money down against the purchase price, as you normally do. This is considered to be quite a risky loan for the lender to have underwritten, so you will have to pay a high interest rate. Furthermore, if you ever get behind in your payments, the lender may not be as gracious about working with you while you get yourself caught up as they might be with someone who has a conforming loan and gets behind.

A 100% mortgage may be the perfect solution for somebody who doesn’t have much money to put down against a home purchase. FHA loans allow up to 97% financing, but their strict maximum loan amounts, which can vary even from county to county, may make it so that you cannot get enough to buy a particular house. If you’re a first-time home buyer, you may want to consider a 100% mortgage. However, there are drawbacks to these mortgages that you need to be aware of.

It’s possible that you have to sign a contract agreeing to keep the home for at least a certain number of years. If something comes up making it so that you have to move before that time is up, you might find it hard to get out of the loan. Also, you cannot take a 100% mortgage with the idea of flipping the home or only staying in the home for a year or two if this is the case.
You will probably not be allowed to pay off the mortgage early without paying penalty charges. The lenders and their investors expect to be compensated for their taking on this high level of risk.
The lender will probably make you pay for a mortgage indemnity guarantee (MIG) insurance policy to protect itself in the event that you default. This will be an added expense on top of your high interest bearing payments.
You will need to have sufficient assets such as stocks and bonds in order to qualify for the 100% loan. In the event that you default, your assets might have to be liquidated.
If home prices in your area fall, you could end up with “negative equity”, meaning your owe more than the value of the home. This could make it hard for you to sell your home even after you are eligible to do so, since the buyer would have to give you enough to buy the house and pay off the difference in what you owe to the lender.

So, consider 100% mortgages with care before you commit to one.

By: Joe McLaughlin

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