100 percent financing
100 percent financing means purchasing asset like land, home, automobile etc without providing any margin. For example, if a person wishes to buy a home worth $500000 and gets a loan of same amount, it would be called as 100 percent financing. Thus, there is no requirement of down payment or contribution. 100 percent financing would definitely attract large numbers of borrowers as they can fulfill their wishes without providing any amount.
They are not required to liquidate any of their investment or stocks. In some cases, tax benefits are also obtained. 100 percent loans are like regular loans so far as repayment, interest application and loan term is concerned. A borrower can choose among various available options as per his income and requirement. Many people feel that these loans attraction additional closing costs. This is not completely true as lower loan amounts do not attract any additional cost.
Are They Really Available Hassle Free Now Up to some years back, lenders were very eager to go for 100 percent financing. These loans were generally offered to customers belonging to a particular group. For example, local banks were offering 100 percent finance to people that belonged to low income level group. Similarly, these loans were offered in good numbers to people that wanted to buy real estate in neighboring areas that were chosen for revitalization. As far as conventional borrowers are concerned, there were some hassles. But loans were still offered.
As these loans become quite famous, conventional borrowers were also entertained by local lenders. In some cases, these were offered in partnership with the local real estate companies. In a study, it was found that about 50% of lenders had come up with 100 percent financing for accommodating maximum numbers of customers. A great push to these loans in U.S was given by United Guaranty. Under the program called as Borrower Advantage, borrowers with credit scores of 700 and above were offered 100 percent home loans. Even in some cases, closing costs were also financed which raised the loan to value to 103%. Professionals that wanted to have home of their own but were not able to make down payment turned up in good numbers.
At present, scenario has changed and lenders are reluctant to offer these loans. This is because in absence of any contribution from the side of borrower, loan amount is at great risk. If borrower does not repay the amount, lenders are left with no option but to adopt legal process for selling the asset mortgaged or pledged. Legal processes are often tedious and it takes lot of time to reach at any favorable judgment. There are some other restrictions also that are attached with these loans. First is the asset depreciation. If any lender is offering 100% car loan, it is actually taking a lot of risk. This is because automobiles depreciate with time and in a span of four to five years, worth of car may be reduced by 50%.
If any borrower has taken a car loan for a period of seven years without making any down payment and he defaults in loan repayment from second years onward, lender cannot think of recovering principal amount even if it sells the car. This is the reason why lender may ask for any additional security while offering 100 percent car finance. In case of mortgage loans, risk is still there. This is because though real estate appreciates with time, any recessional pressure might cause its value to fall. Right now, we are experiencing a recessional phase and prices of real estate have actually dropped from their peaks 18 months ago. If any lender had given a 100 percent mortgage loan in that period, it cannot recover its amount right now by selling the real estate financed. That is why one finds few lenders only having 100 percent financing option. Even they have certain requirements that have to be met. For example, lender may require mortgage to be a first mortgage only. There can be restrictions regarding the income levels or repayment period or interest rate. Most of lenders, while offering 100 percent loans, require that real estate purchased is owner occupied. Credit score of borrower must be over 650. Some lenders have raised the minimum credit score requirements even more due to changing standards in the mortgage industry.
Some Important Aspects
100 percent financing was quite common 2-3 years back when economies were experiencing real estate boom. There were borrowers in large numbers and they were looking for mortgage loans desperately for becoming homeowners or land owners. Since real estate values were appreciating quite fast, lenders were sure about the saleable value. They earned good profits by charging higher interest rates from their customers. Right now, picture is altogether different. 100 percent financing is being provided for new construction purpose only. After construction of home, value of real estate would definitely increase and lender would have an edge over that. Even combination of mortgages is also accepted by the lenders.
Many experts feel that 100 percent financing is a risky proposition for borrowers in present times. If possible, these should be avoided to the maximum possible extent. People have lost their homes in great numbers due to real estate depreciation. With no equity, which certainly would happen in case of 100 percent financing, a meager downfall in the real estate price would result in borrower having more outstanding than worth of his home. In such circumstances, private mortgage insurance may be necessarily asked. This would make mortgage payments even tougher. On other hand, a 20% margin or down payment would be very healthy for a borrower. He can continue the repayment program without any desperation. There would be no calls from the lender regarding outstanding loan amount becoming more than the worth of home.