One hundred percent financing has now become a common choice for home buyers. As the Real Estate Finance Industry continues to adjust to the rising market, more options are available for borrowers who are trying to keep their money in the bank. Too many times I’ve seen people buy a home with no money down, and after paying all their closing costs they were left with nothing in reserves. This is a dangerous situation for borrowers to put themselves in. As a loan officer, I always prefer to see at least 2 months reserves (2 months total monthly housing expense in liquid able assets) after closing for emergency situations for all my clients. Over the last year I have helped many home buyers purchase their home with no money down and no cash to close. Thus, putting aside the money they would have spent on closing costs into their saving account for future needs. For your benefit I would like to share with you how these loan programs are structured and the process involved in acquiring one.

When it comes to 100% financing, I believe all professional loan officers will structure the loan with an 80% 1st mortgage and a 20% second mortgage (the two combined equaling 100% of the purchase price). The most important reason for your loan to be structured this way is that it will save you money. Let me quickly explain how. Whenever you have a single loan that is greater than 80% of the appraised value of the subject property, there is going to be M.I. (mortgage insurance). This is an extra monthly fee that will be added to your monthly mortgage payment each month. If the lender is going to take a greater risk having a single loan over 80% of the appraised value, the borrower is going to have to pay more money.

In looking at the example below you can see the difference in payment between the two options (the 80/20 a and straight 100). Although it is more work for your loan officer to structure an 80/20 loan than a single hundred percent loan, it is going to save you a substantial amount of money.

Home Purchase of $275,000

Single Loan at 100% ltv (loan to appraised value) Loan amount: $275,000 30 year fixed at 5.875% with M.I. Total monthly mortgage payment: $1846.73

First loan at 80% ltv and a Second at 20% ltv 1st loan amount of $220,000 and 2nd loan amount of $55,000 30 year fixed at 5.875% 1st and 7.875% 2nd NO M.I. Total monthly mortgage payment: $1699.80

Both of these two options offer no money down, but there are still several thousand dollars in closing costs to be paid at closing. In order to incorporate the closing costs into the loan amount, the real estate agents and loan officer involved include a seller credit within the purchase contract. A seller credit towards closing costs, enables the borrower to pay the closing costs with their mortgage.

For example: After consulting with my clients we decided it would be in their best interest to make an offer on a property that included a seller credit towards closing costs. The home they were interested in was listed at $249,000 and was being offered at a fair price. They decided to make an offer of $255,000 with a $6,000 seller credit to buyer for closing costs. This way the seller will in actuality get their full asking price and my clients would get all their closing costs paid, no money down and no cash to close. This does raise their loan amount by $6,000 and increase there monthly payment by $35 dollars a month. But, most of my clients (and myself included) would prefer to pay an extra $35 a month and keep that $6,000 in the bank.

Wrapping your closing costs into your home loan can free up extra cash, even if it simply means having the extra money to furnish your new home, It is important to make sure you loan officer is in contact with your real estate agent when making an offer that includes a seller credit. When working with my client’s real estate agents, I usually fax them a copy of how the wording should exactly read in the purchase contract for the seller credit. Just one incorrect word in a contract can get your loan denied. Please refer to “the first article” of this series and make sure your loan officer is knowledgeable and doesn’t cost you the home of your dreams.

Next month I want to address one loan program directly, the “Pay Option Arm” or “Pick-a-Payment”. Many people are choosing this program for the incorrect reasons. For a few it is the perfect choice, but for many it is moving in the wrong direction.