No-one will argue with the fact that raising the necessary funds to buy a home is a difficult undertaking. But trying to do so with bad credit scores to your name is even more difficult. What not everyone knows is that 100% financed mortgage loans are available even when bad credit is a factor in the equation.
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For current renters, this is welcome news, allowing them an opportunity to become homeowners despite their imperfect financial situation. But how can approval with bad credit be possible when a typical mortgage is so high?
There are good reasons why some lenders are willing to grant a mortgage loan. What must be remembered is that no lender is out to lose money, so their offers are calculated to benefit them too. Here are some factors that should be considered when contemplating buying a home.
What is 100% Financing?
The idea of 100% financed mortgage loans might seem a little strange, but there is nothing to be suspicious of. Usually, buying a property involves making a down payment and paying off the rest with a mortgage. What 100% finance means is that no down payment is required.
It is even possible to get 105% financing, with the extra 5% used to cover the closing costs of the property deal. Between legal representation and other costs, the fee on top of the property price can be $10,000 to $30,000, so approval with bad credit can prove expensive.
However, there are certain conditions that need to be taken into account too. For example, the interest charged on a mortgage loan can be quite high, and the interest structure quite complicated. So, some planning and research is required before advancing with the application.
Advantages of 100% Financing
Despite the associated costs, there are some real benefits to seeking 100% financed mortgage loans. The most obvious comes with the fact a down payment is not needed. This means there is no need to spend time saving as much as $20,000 in cash.
Another is that private mortgage insurance does not need to be paid, as it is covered by the interest rate. This rate is going to be much higher than normal, but works out as being beneficial overall – not least because those who arrange this insurance separately end up tagging on a fee too.
Of course, a key benefit is that, in getting approval with bad credit, the chance to buy a home becomes a reality. This alone makes whatever negative aspects that might be associated with the mortgage loan covering the total price of the property may come with.
Disadvantages of 100% Financing
There are a few disadvantages to getting 100% financed mortgage loans. For example, even with no down payment to worry about, the overall cost of the mortgage can be higher. With a $200,000 property, a $200,000 mortgage repaid over 30 years costs more including interest, than repaying a $180,000 mortgage after a 10% down payment.
Bear in mind too that because the applicant gets approval with bad credit, the interest rate is higher. This means the full repayment sum for the term of the mortgage is going to be very high. What is more, the rate is adjustable rather than fixed, which means the repayments can increase dramatically in time.
Finally, by using a 100% mortgage loan, the buyer starts with zero equity. Normally, the equity is represented by the size of the down payment. And with no equity, there is no security should a loan be required in the near future.