It seems that 100% financing on mortgage loans with bad credit is a dream come true for every mortgage applicant. But it is important to know there are pros and cons to the deal.
On the face of it, securing 100% financing on mortgage loans with bad credit seems like a huge stroke of luck. It removes a big part of the headache that comes with buying a home, and everything is much more straightforward and easy to follow.
But while there are certainly advantages, there are also disadvantages, and it is important to weigh these factors up before getting mortgage approval on those terms. What is essential to consider is that the larger the loan the greater the debt, and the higher the percentage mortgage, the larger the loan borrowed.
Calculating the actual consequences of the selection of mortgage loans available is important if the right one is to be secured. And while 100% financing might be perfect for one, it might be too much to handle for others.
Advantages of 100% Financing
There are two principal advantages to getting 100% financing on mortgage loans with bad credit. The first, and most obvious, is that it makes it unnecessary to find alternative sources of funding to raise the down payment. Usually a mortgage lender is willing to provide funding on between 80% and 90% of the purchase price. The remaining share is paid for through a down payment.
However, the task of saving that amount of money – perhaps as much as $20,000 – is a big ask. At the very least, it can delay the ability to buy by a year or more. Alternatively, some home buyers secure the balance by taking out a personal loan. Still, getting mortgage approval on 80% of the price is a major investment in its own right.
The second advantage is that private mortgage insurance is not necessary when securing this kind of mortgage loan. This might seem a small issue, but paying this insurance is widely considered a waste of money, with the sum better spent on the home itself.
Disadvantages of 100% Financing
Of course, there are also disadvantages to taking on 100% financing on mortgage loans with bad credit. The most obvious is that the size of the loan is much higher, and thus pushes up the overall debt.
With a 100% loan, the absolute maximum sum needs to be repaid, complete with interest. This can mean an extra $35,000 or $40,000 over the lifetime of the mortgage. So, when getting mortgage approval on these loans it is important to understand the difference they will make financially.
A second concern is that, when buying a home with a 100% financed mortgage loan, the homeowner starts off with no equity. When a down payment is made, it is independent of the mortgage and, therefore, it is the home equity, which can be used as security to secure financing at a later date.
Which Lenders to Consider
Generally speaking, the best lenders to go to when seeking 100% financing on mortgage loans with bad credit is to sub-prime lenders. This is because they specialize in loans to those in tight spots financially, offering terms that are more affordable.
They are not perfect in every way, however, as their loans come at higher rates of interest than others. But they are more willing to accept the risks involved in lending to applicants with low credit scores. This means that getting mortgage approval is much easier, but there is a higher price to pay.
Their products can be complicated, with adjustable rate mortgages included in the opening 3 or 4 years. Then a 30-year fixed rate mortgage loan begins, which can be more expensive because of the accommodating measures adopted in the adjustable rate mortgage at the start.
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