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Looking to finance your new home in 2020? In the current housing market, there are many different mortgage products and options to choose from. 100% financing promises a no-down payment mortgage for select home-buyers. 100% financing can be a tempting mortgage option for a buyer or family without a deep savings account.
While 100% financing mortgages sound intriguing, it's important to understand the financial offer before accepting it. Not all financial deals that sound good are in your best interest. 100% financing can be the ideal solution to your home-buying plans, but only when you fully understand how it works and how to manage your finances to make it work.
Let's unpack what 100% financing means and how it might be useful to your home-buying plans.
100% Financing Means No Down Payment on Your Mortgage
100% financing on a mortgage is when you don't pay the down payment portion of your repayment plan. It's not a savings, you just don't have to pay for the down payment amount right away.
In a conventional mortgage, the homebuyer applies for a mortgage of a certain size. As an example, let’s say the homebuyer is purchasing a home for $200,000. The check the bank writes to the seller to get that house in the homebuyer’s name is for $200,000 (100% financing). Alternatively, the homebuyer would pay the bank a down payment of 15%, which would be $30,000, and the amount borrowed by the homebuyer to pay off would be $200K - $30K = $170,000 in a conventional loan.
Therefore, 100% financing is when the home-buyer does not pay the $30K, and the bank fronts 100% of the $200K without asking for a down payment.
The Costs You Do Pay Up-Front
It's important to remember that home-buying has a lot more expenses than just the mortgage down payment. The down payment is the biggest up-front expense of a standard home purchase which is why people save up for it specifically. But there's also earnest money and closing costs that will need to be paid in order to take command of your home. Plus, probably, a few miscellaneous fees for inspectors and other fees you should ask about.
You Still Put Down 'Earnest Money'
Earnest money is how buyers show sellers they are not just wasting time. It's like a security deposit on the sale itself. If the sale goes through, you get your earnest money back. But you still need to have it in your account ready to put down around the time that you make your bid to the seller. The earnest money is held in escrow (a special holding account). If the seller fails to complete the sale, you get the earnest money back. But if you fail to complete the purchase by dropping out, you don't get the money back.
You Still Pay Closing Costs
Closing Costs is the bulk-term for any expense related to completing the sale and transferring the home to your ownership.
Closing costs, generally, include:
- Paying your inspector to ensure the home is safe
- Paying for a title-check to ensure the home is really theirs to sell
- Paying for lawyer time and document filing fees to legally complete the contract and sale
- Paying your real estate agent their commission
- Homeowner's insurance for the mortgage
- Initial property taxes
- There's always a few miscellaneous closing fees to be ready for as well
Closing costs can be several thousand dollars, so you'll need to have this cash on-hand even if you aren't paying a down payment to the bank.
Meeting Your Bank's 100% Financing Qualifications
Finally, you'll need to make sure you qualify for a lender's 100% financing offers. Veterans are often included in qualified groups, along with members of credit unions and individuals with sterling personal finance records. So what is 100% financing? It means that the lender is willing to cover the entirety of the mortgage without an initial down payment. This can be great for a home-buyer looking to buy a home without deep savings, but you will still need a few thousand on-hand for earnest money and closing costs.