Over the last decade, typical conventional lenders have been offering 100% financing to home buyers This usually involves creating an 80% first trust deed and a 20% second trust deed. This further allows home buyers to purchase a home with no money down.
To understand how this works, you will also need to understand two basic types of loans:
Conforming and Jumbo.
Conforming interest rates cover loan amounts up to $417,000. Jumbo loans amounts cover loans over $417,000.
The differences between conforming and jumbo loans are usually the interest rates and certain conditions required. Conforming interest rates are lower than jumbo interest rates.
When you are looking on the internet for current interest rate quotes, the typical rates shown are for conforming rates.
Your first trust deed or the 80% loan is based on conforming or jumbo rates, depending on the purchase price of your property.
The second trust deed or the 20% loan is based on what's called "piggy back" 2nd financing, wherein the lender gives special rates based on the fact that you are also obtaining a new first trust deed with that lender.
The interest rate for the 2nd trust deed is going to be higher than the first trust deed, sometimes as much as 3% to 5% higher.
The lender then gives you what's called a blended rate, combining the interest on the first trust deed and the interest on the second trust deed.
Typically, this type of 100% financing is fixed for 2 to 7 years and many include prepayment penalties.
Some lenders also require an impound or escrow account to pay property taxes and home owner's insurance in your monthly payment. There will be an initial deposit prior to closing to establish your tax and insurance account so that when these bills are due, there is enough in the impound account to pay these bills.
This loan program will help you purchase a home with no money down.
If your loan comes with a prepayment penalty, when that period is over, you are free to refinance the two loans into one, fixed for 30 years, if you so desire.
A really good aspect of 80/20 type financing; there is no mortgage insurance premium to pay each month, which will keep your monthly payment lower. This premium is typically based on .50% of the loan amount divided by 12. (example; loan amount of $250,000, monthly mortgage insurance premium would be approximately $104.17) There is also an upfront premium to pay in your closing costs. Some lenders will add this to your 1st trust deed loan amount.
In order to have no mortgage insurance the first trust deed must be at 80% or lower.
There is also a single 100% loan available.
If you have necessary credit and debt requirements, it is possible to obtain a 100% first trust deed. Each lender who gives this type of financing has their requirements.
You will be making a single monthly payment based on your entire purchase price.
This type of loan will include the monthly mortgage insurance payment added into your monthly payment as the loan is over 80% of the purchase price.
To recap, 100% financing means that you are financing the whole purchase price of the home you are buying. You are putting no money down. Under typical circumstances the financing is 80% first trust deed and a 20% second trust deed.
Because you are financing the whole purchase price, interest rates may be higher than a typical 30 year fixed rate loan, but you are putting no money down. The lender is taking a higher risk so interest rates are probably going to be higher.
By Patti Schopper
Published: 9/6/2006
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