Is this a case of “Sounds too good to be true?”

These types of loans are written every day. Let’s take a look and see if one of these zero money down mortgage programs is a fit for your home buying needs.

The 100% Loan with PMI

Mortgage down payments are necessary buffers used by lenders to protect themselves from potential loss due to costs of foreclosing a property in case of loan default.  A 20% down payment is considered sufficient protection, and is therefore industry standard.  Any amount less than that will require some other method to reduce lender’s risk.

One such method is private mortgage insurance, or PMI, which is paid by borrower for insuring lender against loss.  You will have to pay it until you have built up 20% equity in your home.

When obtaining this type of no money down loan, you are simply taking out a mortgage loan for 100% of home’s cost and paying PMI.

The 2/28 or 3/27 Loan

If you decide to take a 100% loan, you may be restricted to 2/28, 3/27 or similar loans, especially if you have low FICO scores or have been determined to be a sub-prime borrower for any reason. Depending upon whether it’s a 2/28 or 3/27 loan, interest rate is fixed for first two or three years and then is variable for remaining life of loan.  Loans in which interest rate is fixed for a number or years and then becomes variable rate are also known as hybrid loans.

If your FICO scores or whatever conditions caused you to be classified as sub-prime can be remedied during fixed interest rate period, then you can apply for a more conventional mortgage before variable rate period starts.

The 80/20 Mortgage

This is one of most common programs and it works like this: The lender writes you a mortgage for 80% of selling price of home and then either same or an affiliated lender writes you a second mortgage for remaining 20% of home’s value.

This is a good solution for avoiding PMI (Personal Mortgage Insurance) payments for borrowers who do not have a 20% down payment available.

One of down sides of this solution is that you usually have to pay two sets of closing costs, but those costs will still be far below what a typical 20% down payment runs.

Is it all just one big roll of dice or are there quantifiable factors that a lender uses to qualify you for a loan and determine your interest rate? Let’s take a look and see.

Understanding mortgage rate advertising campaigns

Generally qualifications for these “almost too good to be true” low interest mortgage programs are quite high. Many are so high that most people who respond to advertising won’t qualify for them.

Why do lenders even bother spending money on advertising a mortgage program that most people can’t qualify for? Mortgage promotions bring in large numbers of applicants. Some will qualify for promotional rate and others will not. The lender hopes to place everyone who applies into some mortgage program that they offer even if it wasn’t one borrower responded to.

Navigating Home Mortgage Qualification Process

The lender reviews your credit and overall financial condition when qualifying you for a particular mortgage program. Most lenders consider these items:

• Stability – Length of time on job and number of jobs held.

• Liquidity – Availability of down payment and other on-hand and reserve funds necessary to close loan.

• Credit – Previous loan repayment history as well as certain credit-related scores.

• Income – Ability to service loan by making required payments.

• Liabilities – The total amount of money that you owe other than your current mortgage or rent payments.

The credit investigation causes borrowers most concern and that’s probably because it’s most misunderstood of approval steps. There is nothing secret going on here and mortgage lenders are very up front about what they will be checking.

Shining light on your credit history

Credit bureaus use a rating of zero through nine for each of your credit lines. They put either an “I” (for Installment loan) or an “R” (for Revolving loan) in front of number. I0 or R0 indicates that credit line is “too new to rate”. I1 or R1 is best rating and R9 or I9 is worse.

This worked fine for years until credit usage became more widespread and amounts borrowed became significantly greater. That’s when lenders began looking for a statistical model which could predict how you would perform on a loan based upon measurable factors. This evolved into FICO score which plays a prominent role in determining if you get a home mortgage as well as what terms of mortgage will be.

FICO stand for “Fair Isaacs Corporation”, name of company that developed software that calculates score. FICO scores can range between 250, highest degree of risk and 850, lowest degree of risk. All else being equal, higher your FICO score better loan terms will be.

Taming your FICO Score