A 100% mortgage is obviously a boon for financially weak borrowers who cannot put up any deposit to avail the loan. The scheme allows borrowers to take out an amount equal to the value of the collateral without submitting any deposit, which in other cases is usually a minimum 5% of the amount to be borrowed. Also, borrowers have a choice of mortgages to choose from, just as they would in a more conventional product. They can choose from fixed rate, discounted rate, capped or variable rate. However, they can not take out a buy-to-let mortgage under this scheme unless they put down a deposit.
These are also available to people with a poor credit rating. There are several sub-prime mortgage lenders offering such packages for homebuyers, including 103% or 107% mortgage loans to cover their closing costs. However, in this case a majority of lenders have stricter terms and higher rate of interest because of the higher risk involved. Hence, those with a good credit history can expect to get more attractive terms and affordable rates of interest. Typically, 103 percent full document loans require a score of at least 600. A credit score of at least 680 is required for 107 percent home loans.
Also, since borrowers are getting the credit against the full value of their collateral without a deposit, they are perceived as riskier to the lenders. Due to this reason, the options are normally offered at higher interest rates than other type of mortgage products. A risk the borrowers could face is that when they do not make a down payment on a mortgage purchase, they typically have very little equity of the property. If property values in the area decrease, borrowers could end up owing more for their home than it is worth. Also, if the borrowers default on the repayment schedule, they risk losing the property as the lenders are legally empowered to initiate actions to take possession of the collateral.
In order to protect themselves in the case of default, most lenders require borrowers to take private mortgage insurance (PMI). This insurance varies in cost depending on the size of the mortgage loan, and must be carried until enough equity has built in the home or until borrowers have proven that they can make payments in a timely manner. There are also several options without this restriction. Additionally, if the borrowers want to avoid private mortgage insurance, they can take out what is called 80/20 option under which borrowers can take out two loans. The first covers 80% of the purchase price of the property, and the second acts as a 20% deposit. However, if you can find a mortgage lender willing to finance the entire amount with one mortgage, that would be the least expensive option.
There is also a stated income no money down options. Borrowers opting for this will likely need 12 months of banking statements, tax returns for the past two years, and a credit score of at least 650. Individuals with poor credit history too can qualify if they have minimum point of 580 in the credit rating rung. However, each lender has different criteria for determining who will qualify. Most sub-prime lenders require any bankruptcies or foreclosures to have been at least twelve months ago, where as other conventional loan require these to be discharged two to four years ago.
Hence, doing proper research and comparison studies are necessary to locate a suitable and cheaper option. This can be done through online lending sites or with the help of a qualified financial advisor.
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