The Demise of 100% Financing

100% financing is quickly becoming a thing of the past.  A year ago, anyone with a credit score over 620 and a little bit of money in the bank could qualify for 100% financing on a home purchase.  That is not the case any longer.

The most common method of achieving 100% financing was to split a transaction into two loans with the first mortgage accounting for 80% of the purchase price and a second 20% mortgage making up the balance.  This allowed a borrower to avoid paying private mortgage insurance because as long as a loan amount is not over 80% of the purchase price, PMI is not required.  The number of lenders offering second mortgages has plummeted with the retraction of the mortgage market and now it is hard to find any lenders that are willing to offer second mortgages up to a combined loan to value of more than 75%.  Second mortgages have become too risky for lenders.

The other method of achieving 100% financing was to take out a single loan for the entire purchase price and pay private mortgage insurance.  This is still an option in some markets but for many markets in areas that are seeing property values fall, lenders have put declining market guidelines into place that reduce the loan to value that they are willing to go up to for those higher risk areas.  This means that the maximum loan to value drops by an automatic 5% for all of their programs.  A borrower may qualify for the 100% program that a lender offers but they will be required to put 5% down due to the declining market.

These changes in the mortgage market mean that it is constantly getting more and more important for borrowers to have some reserves in the bank when they go to purchase a home.  Those that don’t have the ability to put any money into the transaction are likely to find that they are unable to qualify at this point in time.  It is also vital that potential buyers take every possible measure to keep their credit scores as high as possible.  Making payments on time is the best way to keep those scores up.  A recent 30 day late on a $5.00 balance could drop a borrower’s credit score enough to make the difference in them qualifying or not qualifying to buy a home in the current market.

Happy house hunting,

Ben Hawkins

President

Arizona Home Loans

O~480-947-6200 x 105

C~602-410-6388

F~480-947-0767