No Money Down And High Loan-To-Value Home Purchases
Copyright 2006 Jason P Bertrand
In many cases it is difficult to obtain financing with little or no down payment. The lender will usually look for very high credit scores and a very thorough payment history. In some cases it may be easier than one would think. Twenty years ago it was always a rule of thumb that one needed to put down at least 20% in order to purchase a home. Last year over 40% of home purchases were made at 100% loan to value.
One reason that people avoid high loan-to-value loans is the fact that a lender will require mortgage insurance if the loan-to-value ratio exceeds 80%.
Loan to value is the ratio of the loan in comparison to the value of the home. For example:
Home Value = $100,000
Loan Amount = $80,000
Loan-to-Value ratio = 80%
In this example the loan to value ratio is 80% because the loan amount is 80% of the value of the home. Mortgage insurance is a policy that protects the lender in the case of default by the borrower.
One way around mortgage insurance is to take out what is called a piggy back loan. A piggy back loan is taking out a first mortgage for 80% of the value, in the case of the example $80,000 and a second mortgage for the remaining 20% which would equal $20,000. You are now in a situation where you have a 100% financing situation but are not open to mortgage insurance.
Generally the interest rate on a second mortgage is higher than the interest rate on the first mortgage, but the difference is less expensive than what the mortgage insurance would cost.
Another way to finance a home with very little money down is to work the closing costs into the scenario. A lender will generally allow a seller to pay a certain amount of the closing costs. This allows for a higher loan to value ratio.
High-Loan-To-Value loans allow both home buyers and investors to keep cash on hand for home improvements or other investments and are a great way to purchase a home without large amounts of cash on hand.
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