100% Mortgage Pros and Cons

Author: Rob K. Blake | Date: December 15, 2007 | Filed In: Mortgages

The 100% mortgage programs are really popular right now. The 100% mortgage is a loan program which requires no down payment. Therefore, trouble may be brewing.

Now on the surface a 100% mortgage this seems like a great idea. Since most surveys show the number one reason for not buying a home is no down payment, a 100% mortgage allows thousands the opportunity to be home owners. That is the pro for these no down payment loans. Now for the cons.

Could there be any problems giving thousands of cash-strapped people trillions of dollars worth of easy financing?

My guess is yes…of course. But it doesn’t really matter, it’s too late. They already have the money or soon will.

If you are considering a 100% mortgage program learn all about them and beware of the dangers before signing on the dotted line.

There are three basic 100% mortgage programs:

The Fannie Mae Flex 100, the Freddie Mac Gold, and the 100% mortgage program for those with bad credit or what we call Subprime 100% Mortgage.

Fannie Mae Flex 100 and Freddie Mac Gold

We’ll discuss the Fannie Mae Flex and Freddie Mac Gold loan programs first. It requires no down payment, so if your price is $300,000 then your loan will be $300,000. If you negotiate the closing costs to be paid by the seller, you can get these loans with as little as $500 out of pocket!

Fannie Mae and Freddie Mac are both quasi-government entities that create underwriting guidelines and insurance certificates to facilitate selling mortgages to the secondary market.

Without a nationwide standard of underwriting the risk one loan has over another would not be determinable or uniform. Without a uniform standard of risk, the final big investors (ie. Wall Street, mutual funds, foreign banks, insurance companies, etc) would not feel comfortable buying them for their investment portfolios. Fannie Mae and Freddie Mac insurance gives the final investors peace of mind to invest trillions in conventional mortgage loans.

The Freddie Mac Gold and the Fannie Mae Flex 100 mortgages both have enormous monthly MI costs and carry a higher than standard rate.

Sounds great, right?

Well, it is if you can afford the payment! It’s the kiss of death if you can’t.

I have a feeling we are going to see the danger in these loans as the market weakens.

Foreclosure is highly correlated with homeowners that have no equity. Borrowers with no equity don’t have options should something happen. If a financial hardship hits a person with equity, they have the option to sell or refinance.

Those without equity (and no money) can’t sell since they have no equity to pay the agent commission. So in their case a financial hardship just pushes them into foreclosure.

Be very careful when using 100% mortgage programs. Under buy to be sure you can always afford the payment since you won’t have the equity to sell or refinance possibly for years!

Subprime 100% Mortgage Loans

Well this is just trouble…with a capital T…which is why most of these programs have gone the way of the Dodo bird.

Bad credit and no down payment is a recipe for disaster. If you have bad credit and no money…Don’t buy a house! You’ll regret it. Get your credit back on track and save a little money. Buy in a few years when values have dropped back to normal…you’ll thank me.

But if you have good credit and want to shoot for one of the conventional 100% mortgage programs make sure your application is run through automated underwriting to guarantee approval. You’ll need to find a mortgage broker versed in running automated underwriting. To learn how to find a technologically savvy, ethical, mortgage broker check out The Mortgage Advantage.

Good Luck!

UPDATE:Terri just informed me if you live in an area FNMA has deemed “declining” running the automated system is imperative since a 100% loans in declining area are difficult to get approved.

Author: Rob K. Blake