100% Financing

This seems to be a topic that comes up a lot. Many times when I am out attending social events, the conversation turns to the mortgage industry and all the half information that the general public has heard through the media.

 People always come up to me and comment about all the risky mortgages that were done and the reasons for the sub-prime meltdown.  I always hear ” I can’t believe they were doing 100% financing!”

And I always rebut with, they’re still doing 100% financing!

Right now, 100% financing is not a very risky loan to the lenders.  The loans that were done over the last couple of years at 100% financing were risky because they were also No Income verified. The combination of those 2 factors are what made those loans so risky.  A mortgage is as good as the ability of the borrower to re-pay the loan.  Most of the loans that went bad, were the result of highly speculative investors who were getting into homes with no money down, with the hope of flipping them for a profit.  When the market turned, these borrowers were left holding the hot potato and just dropped them.  They couldn’t afford to make the payments and let the homes go to foreclosure.

Today, 75% of all my new purchasers are making down payments ranging from 0-3% down.  These loans have very attractive rates but do require good credit and full income verification.  If you’ve been renting for $1500 per month for over 3 years and you could purchase a home for say $1800 per month why wouldn’t you?  The lenders feel the same way.

Generally, 100% financing were risky loans, because if the borrower didn’t pay, the lenders assumed they would recoup 80% of the loan from a foreclosure sale.  ( this 80% mark is the mendoza line of mortgages, ” baseball reference”).

However, on today’s 100% financing products, the 80-100% equity is insured through the use of PMI ( private mortgage insurance). The borrower pays the cost of an insurance policy that insures the lender that if the loans goes bad, the PMI company will cover some portion of the outstanding loan balance.  The lender can now foreclose, recoup 80% from the sale and make a claim against the PMI company to offset it’s loss.  What a wonderful world we live in!

No matter what, the risk of any given loan is set by the ability of a person or entity to re-pay the loan and the collateral that secures the loan if for some reason the loan is not paid back.  Today’s 100% loans are being checked for the ability to re-pay and are being insured through the use of PMI.  There’s no reason why lenders shouldn’t be offering these loans.  As a matter of fact, they are being offered at better terms than were around 2 years ago.

Don’t be swayed by what you hear in the media, often the information is wrong or being told as partial truth. Consult a mortgage professional and do some research.  And the next time you are at a cocktail party and hear ” I can’t believe they were offering 100% financing”, brush it off as another mis-informed 10 o’clock news watcher.

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