100% Financing in 2007 and Beyond

One of the most commonly asked questions that I get from realtors and clients now days, is who can qualify for 100% fianancing and how to qualify for it.

Mr Housing BubbleIf there’s any loan out there more likely to burst the infamous housing bubble it would have to be the misuse of 100%-interest-only-adjustable-rate financing.  So let me address this question head on as the mortgage industry is changing dramatically. 

In spite of all that is going on the mortgage industry these days, this doesn’t mean there’s not an appropriate place for 100% financing.  It does mean however, that before you consider 100% financing you must first understand the proper application of this type of loan.   You have to carefully evaluate the subject property and then you must ask yourself several questions about your personal finances and your ability to repay the loan through thick and thin.    

100% Financing is speculative.  

 You are speculating that the real estate you are buying will be worth more tommorow than it is worth today.  So how do we know the answer to this question for any given property?  Well, we don’t.   So right off the bat, you should expect a higher interest rate for 100% financing becuase of this added risk.  What we do know is that given enough time real estate will eventually appreciate, therefore if you hold a property long enough odds are it will be worth more in the future.   

Since banks are assuming the full collateral value of the property during the first few years of ownership, they are requiring a much greater scrutiny of the buyers credit history, the appraised value of the property, and they are taking a much closer look at the buyers liquid assets and income.  (Something they should have been doing all along). The days of stated income 100% financing are long gone.  If you want 100% financing you can still get it, but you need to back it up with solid evidence of your ability to payback the loan.

Here’s a questionaire that will help you determine if 100% financing is right for you.

  1. Do you plan to hold the property for longer than 5 years?
  2. Is the property in a well maintained neighborhood that can be expected to appreciate?
  3. Are you happy with the floor plan?
  4. Will it suit your needs for many years to come?
  5. Is the home structurally sound and not likely to require any major improvements in the next 5 years?
  6. Is your current employment stable?  Is there any possiblity that a life event could cause you to move against your wishes?
  7. Do you have at least 8-12 months worth of house payment saved in liquid assets?
  8. Is your credit score above 700?
  9. Is your overall debt ratio less than 50% ? (meaning that less than half of your gross income is going towards  your debts including the new house payment)
  10. Is your income documented and verifiable through pay stubs or tax returns?

If you answered “Yes” to all of the above questions then there’s a good chance tht 100% financing may still be an acceptable form of financing for you.  If you answered “No” to one or more of the questions then you should probably consider other forms of financing or put your plans on hold for a while.

This questionaire provides you with a rough guide to help determine your likelihood of qualifiying for this type of loan given the current lending environment.  However, it is essential that you meet with a well trusted mortgage professional that can evaluate all the variables to determine whether or not you should even consider this type of loan.  If the answer is that 100% financing is not the right choice for you, let that be OK.  Focus instead on developing financial plans that can steer you into a home with the “right” loan, even if it means waiting a year or longer.

Fannie Mae and Freddie Mac have many loan programs that can assist borrowers in getting into their first home without taking on unnecessary risks and with loans that make sense.  Many cities have government programs that can help you qualify and otherwise offer you other types of government subsidized loans.

Martin Rodriguez is the Senior Loan Officer – President of SCV Loan Solutions.   A mortgage planning firm that works in affiliation with the financial planning offices of Total Financial Solutions.

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