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Downside to 100% financing?

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foofighter74
Established Contributor

Re: Downside to 100% financing?


@MovingForward_2012 wrote:

@foofighter74 wrote:

@playboy wrote:

What if I turned into a smurf


 

Then you'd have to try and obtain financing on a 3 bedroom, 2.5 bath mushroom home. lol

 


Haha!  You two are funny!  Great post foofighter! 



I'm just trying to entertain myself i suppose. lol  My wife and I have been waiting since December 29th to officially apply for a loan with our preferred lender (waiting out a 2 year bankruptcy discharge), and that day is finally here next Thursday. We were pre-approved, and since that time, my wife's credit scores, which needed to go up dramatically, have done so.  She's also boosted her income by at least $15,000, and we've paid our $5,000 good faith deposit. On the downside, we got aggressive with paying down debt to get her scores up and the bank account and 401k is not quite as healthy as it was. There is some slight concern on my part about the bank account, but thankfully, we have no chargeoffs, collections, or anything of that nature to worry about.  Regardless, we're starting to get nervous. ha.

 

To the OP, I say go for it if it's right for you. But only your family can really make the most informed decision here.

Message 21 of 34
Adalen
Frequent Contributor

Re: Downside to 100% financing?


@indecison wrote:

 


@Adalen wrote:

What if the house is worth more than you financed it for?


What if the economy tanks again and it is now worth less than the loan? For me I would just not do a 100% finance anymore. Its just a YMMV type thing.



I'm not doing 100% financing.  It was just a hypothetical question posed with the assumption of a stabilized market. 


Message 22 of 34
nitedoc
New Visitor

Re: Downside to 100% financing?

What if you r aVeteren? We are approved for 100 0/0 financing.
Message 23 of 34
JM-AM
Valued Contributor

Re: Downside to 100% financing?


@nitedoc wrote:
What if you r aVeteren? We are approved for 100 0/0 financing.

Every ones situation is different.

If 100% financing works for you and your situation at the present time, then there is absolutely nothing wrong with it.

Good Luck
May all your dreams and wishes become a reality!
Message 24 of 34
Kaal
Member

Re: Downside to 100% financing?

With zero down, you'll have to cough up money for PMI which will add a couple of hundred bucks to the monthly payment. That being out of the way, I personally wouldn't buy a house with the way things stand. Housing prices are way over what they should be, at least in a lot of US markets.

Message 25 of 34
sgtm7
Established Member

Re: Downside to 100% financing?

Like other posters have mentioned, it all depends on your individual situation.   Previous poster mentioned PMI if your mortgage is more than 80% of the home value.  This is a pretty good point for those it would affect.   Those with VA loans don't need to worry about PMI.   I did 100% financing in 1995 through VA.   I don't regret it at all.  As my income increased and interest rates changed, I adjusted.  In 2003 I refinanced to a 15 year mortgage.   By 2010 I paid my house off in full.   One of the reasons I was able to do this, is because I bought a house that was only 1/2 of what I qualified for.    I didn't feel comfortable with the "rule" of the payment being 25% of income.  My payment was around 10% of my household income (as a sergeant in the Army).   I retired from the Army in 2003, and then switched to the civilian sector.  By the time I paid my house off (15 years after 100% financing with a 30 year loan), I was making about 5 times as much as when I originally bought my house.   

So in my particular circumstance, in the end it didn't matter that I had 100% financing. 

 

Those who look it at from the perspective of not planning on the staying in the house forever?  I would do one of two things:

1.  Rent instead of buy. 

2.  Buy, with the intention of turning it into a rental property when you do move.  (This is what I do.  I live overseas, and the rent I collect from my house in the US pays for my rent, utilities, food and maid).   

 

Message 26 of 34
student-of-credit
Established Member

Re: Downside to 100% financing?

I assume the home is for you to live in. The lower the down payment, the more expensive the loan. The interest rate goes up as your down payment goes down. Property mortgage insurance (PMI) will be added to your loan payment, (a few hundred a month) until you pay balance down to about 75-80% equity. You will not get the interest rate you stated (on a fixed rate loan), and may not get the loan at all..
Message 27 of 34
student-of-credit
Established Member

Re: Downside to 100% financing?

No one except house "investors" should be using an adjustable rate loan for a new purchase.
Message 28 of 34
madmann26
Valued Contributor

Re: Downside to 100% financing?

I'll add my .02.

 

Circa 2005, my wife and I were looking at buying a house. We rate shopped and when a lender contacted us about 100% financing, we jumped all over it, without knowing any better.

 

It was rough. Our credit was in the best shape and the lender's 100% financing was 2 mortgages, one at 80% and the other at 20% with a combined interest rate of almost 20% (8.x% for the 80% mortgage and 12.x% for the 20% mortgage). Knowing that in a year, we would have to refinance since the APR was going to variable, we refinanced for a static rate and took some cash out.

 

On a 157k house, our payment was $1200/month.

 

It didn't end well and to this day, I wished we had done some homework first. The point of all this is to say, don't get trapped in shopping for a home that is close to your max approved limit just because you can. We ended up in foreclosure and ashamed of ourselves.

 

Since that experience, I have asked some friends of mine and one friend used NACA and swears by it as it helped him get his family a nice home with a decent interest rate (3.x%).

 

On the flip side, if the 100% financing is legit and you're getting a prime interest rate, then by all means go for it. Just be careful.

 

Current FICO 9 Scores



Message 29 of 34
rachelley
New Visitor

Re: Downside to 100% financing?

Pros: no need to save up, move in quickly,

 

Cons: “What-if” the market drops & I’m upside down? (may not matter)

 

“What-if” I have to move sooner than I thought?  (You’ll have to pay to sell your house—will you have the money for it?)   Equity builds up slowest at the beginning, so if you do have to sell unexpectedly, 3 years is not enough time to build up enough equity to cover closing costs or the agent’s commission.  & many—including agents—don’t know how to do a successful short sale if it’s necessary.

 

Things to consider: 

  • For your situation, does 100% financing mean 100% of equity?  (I mean when the house is appraised for $200K, but you buy it for $180K, and get financed for $180K or $185.) 
  • Does 100% financing mean 100% of what you qualify for? (that’s always dangerous—it gives you no leeway for emergencies)  Seems like this doesn’t apply to you since you plan on paying it off before the terms of the loan are up. 
  • Will you be able to afford PMI?  (For VA loans, this is not an issue.) 
  • Will you be able to afford home maintenance with so much going toward the payment?

The psychology behind discouraging 100% financing is because those who aren’t disciplined enough to save the money usually can’t handle the obligation (and extra expense) of a mortgage.  The foreclosure rate drops steadily the more the buyer pays himself.  I know I didn’t phrase that well, let me try again.  Those that have 100% financing are much more likely to go through foreclosure than those that only have 80% financing, hence the reason for PMI.

 

It may work for you.  It has worked for some, but it gets most people into more financial trouble than they can handle. Hope that helps.

Message 30 of 34
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