What are 100% financing home loans?
100% financing home loans, as the
name suggests, are those mortgage loans that finance the entire purchasing
price of a home, thereby eliminating the need of a down payment. Both new and
repeat buyers are eligible for such a type of a home loan through the
government sponsored programs that are applicable throughout the United States
of America.
Many home buyers assume that zero
down payment home loans ceased to exist after the mortgage crisis of the last
decade, but some mortgage options survived and are available even in 2016 that
allow you to finance the entire purchase price of a home. So, don’t be
surprised when I tell you that you can still buy a home with spending zero to
little money from your own pocket as down payment.
If you are wondering that why
most loans require a down payment and why don’t they just normally finance the
100% amount of a home’s purchase price, then it is due to the simple fact that
they wish to be paid back. It has been established collectively by the banks
and lending institutions around the globe that higher the amount of down
payment, lower are the chances of a borrower defaulting on a loan. Therefore,
the amount of down payment is given more importance than the credit score in
determining risk.
The standard down payment amount
today is 20% of the cost of the home and anything less than that requires the
homeowner to take some kind of insurance, like Private Mortgage Insurance (PMI).
The premium of the insurance is then added to the amount of borrower’s loan.
The insurance ensures that the lender will get his money back even if the
borrower defaults.
However, there are some mortgage
programs for which, even with zero down payment, the government provides
insurance to the banker. Here are some of them:
VA Home Loans
The VA loans have been around for
years, but have become popular these days because they require zero down
payment and have lenient credit requirements. People with a military experience
of at least two years (or 90 days if still serving) are eligible for this loan
guaranteed by the Department of Veteran Affairs.
As per the estimates of the
Veteran Administration, approximately 23 million people in the country are
eligible for a VA home loan. The funny part is that half of them don’t even
know that they are eligible for it. Anyone who is eligible can and must avail
the benefit of this zero down payment home loan program. Moreover, VA loans
generally offer lower interest rates than conventional mortgage options and
they also don’t require a monthly mortgage insurance fee.
VA loan is the most affordable
option in terms of upfront and monthly costs as compared to other forms of low
down payment mortgages. With a VA home loan, you can purchase a home with zero
down payment and have the seller pay majority of the closing costs. This means
that you can own a house without spending any money from your own pocket.
Lenders also offer VA loans at low credit scores. You can even secure a VA loan
with a credit score as low as 620, from some lenders.
Therefore, VA loan is the easiest
and most affordable 100% home financing option and if you have served in the
military or someone in your family has, check out your eligibility criteria for
a VA loan and avail its benefits.
Check whether you are eligible
for a VA loan or not, here.
FHA as a Zero Down Payment Loan
The FHA, or Federal housing
Administration, loans generally require a down payment of 3.5%, which is quite
a lot of money. For instance, 3.5% of a $400,000 loan is $14,000. But, not many
people know that there is an obscure FHA rule that allows you to get around
this requirement to some extent.
As per the FHA rules, you can
receive a gift for the entire amount of down payment. You can take this gift
from a family member, spouse, fiancé, not for profit organization or any other
eligible source. This means that you don’t have to come up with the down
payment amount on your own if you can find a legitimate gift source.
So, even while it is not
technically a 100% finance loan, the end result is still the same. If you have
a gift source, you don’t have to pay anything as down payment.
Another niche FHA program for a
select group of people is the Good Neighbor Next Door Loan. Under this program,
public employees like teachers, police officers etc. can buy a home with a down
payment of $100. Again, this is not 100% financing, but it is the next best
thing.
USDA Home Loans
USDA home loan is another type of
home loan that allows you to finance 100% cost of the home. It requires zero
down payment and even the credit score requirements are not that high. Also,
you don’t have to be in a specific job or arrange for down payment as a gift
for acquiring this loan. This might sound too good to be true, but it is a
completely authentic loan option that has provided a home to more than a
million buyers since 1949.
This government sponsored loan
program exists with an aim to encourage home ownership in the rural areas. Therefore, this loan option is also known as
Rural Development Loan.
In order to qualify for a USDA
loan, you must have enough income to support your monthly installments and the
needs of your family, but having too much income leads to disqualification.
Your income must fall within the limits set by USDA. Another major requirement
for qualifying for this program is that you must build/buy a house that lies within
the USDA’s geographical boundaries. The program specifically targets the rural
areas, but many eligible areas are suburban.
USDA mortgage also allows the
seller to pay for your closing costs and with this loan option, sometimes it is
cheaper to move into your own home than renting a place. However, there is a 2%
upfront fee attached with this loan, but it can be accommodated in your loan
amount and doesn’t have to come from your pocket at the time of taking the loan.
The USDA also charges $33.33 per month for every $100,000 borrowed as an
ongoing fee for making this program accessible to other future buyers.
Even with the additional costs,
USDA home loans are a great option to buy a home with little upfront costs and
low interest rates.
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