port orchard real estate financing

I’m approved for a 100% mortgage, why are they asking for money?

March 29th, 2007 by Mark Flanders

This is a conversation I seem to have often in my day-to-day life as a Loan Officer. “Why do I need cash, if I can get a Zero Down home loan?” There seems to be some confusion about what a 100% mortgage is, and what it is not. Hopefully, this article will help clarify things if you’ve ever wondered how it works.

Exchanging cash for a home key Most of us, especially when faced with our first home purchase, have very little to work with in the way of cash. It can easily take years to save a few thousand dollars. Once we do save some cash, we are hesitant to part with it for any reason. Purchasing real estate is one of the few reasons we feel comfortable separating ourselves from the greenbacks we spent so much time and effort gathering. Kitsap real estate is a great place to tranfer your cash. Property values go up over time, unlike things like cars, which lose value the longer you own them.

When you purchase real estate with a mortgage (or even without one), there are additional costs to think about. Lenders will invariably want to see a Title Report and an Appraisal among other things. Credit reports cost money. There may be the cost of a home inspection to consider or a Funding Fee or a Flood Certification or a Underwriting Fee or any of a multitude of fees that you will only need to pay if you are getting a mortgage. These fees add up. They add to the cost of purchasing a home, but they are not part of the purchase price.

When a lender agrees to approve a 100% mortgage, the lender is agreeing to pay for the entire house, not the entire transaction. The cost of the home and the cost of the transaction are two completely different numbers. This is the reason why many first time homebuyers are surprised to find that their new Zero Down Mortgage Approval requires them to come up with thousands of dollars. The lender is agreeing to pay for the house, but not the additional fees. If the lender did pay for all the fees, the lender would be lending more than the value of the home. Loan fees typically cost between 2% and 5% of the loan amount. So if the lender made this loan, they would be making a 102% or 105% mortgage.

A simple way to think about it is to remember that loan fees do not affect the value of a property. If a home has a price of $200,000 and the transaction fees are $5,500, the home is still only worth $200,000, although you will need $205,500 to pruchase it.

Now how about some good news?

Transactions where a buyer needs both 100% financing and the money to cover closing costs are very common! Most first time homebuyers are in this position. And this type of transaction can be done. It just requires a little creativity, the right loan program and a property that is not priced at the very top of it’s market.

Using the example above, what would happen is the buyer and the seller would need to agree to raise the price up to $205,500 with the seller agreeing to pay $5,500 of the buyers closing costs. As long as the Appraisal comes back at a value of at least $205,500, and the lender is made aware of what is transpiring, this deal will work. In most cases, it works flawlessly. Every one of the transactions like this I have handled has closed. The buyer was thrilled, the seller was happy and the lender was content.

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