No one will dispute the fact that raising the funds needed to buy a home is a difficult task. But trying to do it with bad credit scores in your name is even more difficult. What not everyone knows is that 100% financed home loans are available even when bad credit is a factor in the equation.
For current renters, this is good news, as it gives them the 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 make a home loan. The thing to remember is that no lender wants to lose money, so their offers are calculated to benefit them as well. Here are some factors that should be considered when contemplating buying a home.
What is 100% financing?
The idea of 100% financed home loans may seem a bit strange, but there is nothing to be suspicious of. Buying a property usually involves making a down payment and paying the rest with a mortgage. What 100% financing means is that there is no down payment required.
It’s even possible to get 105% financing, with the additional 5% used to cover closing costs on the property. Between legal representation and other costs, the fee on top of the price of the property can be anywhere from $10,000 to $30,000, so getting approved with bad credit can be expensive.
However, there are also certain conditions that must be taken into account. For example, the interest charged on a home loan can be quite high and the interest structure quite complicated. Therefore, some planning and research is required before moving forward with the application.
Advantages of 100% Financing
Despite the associated costs, there are some real benefits to looking at 100% financed home loans. The most obvious comes with the fact that no down payment is needed. This means there’s no need to spend time saving up to $20,000 in cash.
Another is that it is not necessary to pay for private mortgage insurance, since it is covered by the interest rate. This rate is going to be much higher than normal, but it turns out to be beneficial overall, especially since those who purchase this insurance separately end up charging a fee as well.
Of course, a key benefit is that by getting approved with bad credit, the opportunity to buy a home becomes a reality. This only causes the negative aspects that may be associated with the mortgage loan that covers the total price of the property to come.
Disadvantages of 100% Financing
There are some downsides to getting a 100% financed home loan. For example, even without having to worry about a down payment, the total cost of the mortgage may be higher. With a $200,000 property, a $200,000 mortgage paid off over 30 years costs more, including interest, than paying off a $180,000 mortgage after a 10% down payment.
Also note that because the applicant is approved with bad credit, the interest rate is higher. This means that the total payment amount for the mortgage term is going to be very high. Also, the rate is adjustable rather than fixed, which means repayments can increase dramatically over time.
Finally, when using a 100% home loan, the buyer starts with zero equity. Typically, equity is represented by the size of the down payment. And without equity, there is no security should a loan be required in the near future.