ForeclosuresMass - ForeclosuresMass Monthly - Interview With The Expert

100% Financing - Is It Right For You?
An interview with Trish Signet, Loan Officer, Summit Mortgage

Thinking about buying an investment property but not sure if you can come up with the down payment? You may want to consider 100% financing. We sat down with Trish Signet, Loan Officer with Summit Mortgage, to understand what's involved in this creative financing approach.

ForeclosuresMass: Trish, thanks so much for taking the time to speak with us. In a nutshell, what is 100% financing and how does it work?

Trish Signet: The concept is simple: It's a mortgage with no down payment. The typical arrangement is to have a first mortgage of 80% of the purchase price, and then a second (also known as a piggy back loan), for the remaining 20%.

So for example, if the purchase price is $400,000, under a 100% financing scenario, the first mortgage would be $320,000, and the second mortgage would be $80,000. There would be two separate mortgages recorded on the property, and you would make two separate mortgage payments.

* Next 37 17 investors only!

TS: Almost always. The second mortgage is subordinate to the first - meaning that if there's a default and subsequent foreclosure, the holder of the second mortgage is second in line behind the first. That makes the second mortgage riskier, and as a result, most lenders are going to want to hold both pieces.

FM: So what's the advantage of this approach? After all, if the same lender holds two mortgages on the same property, from the same borrower, why not just provide one 100% loan?

TS: Good question. The biggest reason is that loans over 80% typically require private mortgage insurance (PMI). This can cost as much as 1% of the mortgage value over a 12 month period, so it's significant. By breaking it into two pieces, PMI is avoided, reducing the cost to the borrower and making it easier for the lender to package and resell the loan.

TS: Absolutely. In general, if you don't put any money down, you're going to pay a higher rate. That's part of your cost for getting to keep more cash in your pocket.

FM: Is it harder to qualify for 100% financing than for a conventional mortgage?

TS: It's a little tougher than a typical loan, but not impossible. You certainly can't have bad credit and expect to finance 100% of the loan, but you don't need to be perfect either. You just have to remember that in this scenario, the lender is taking a bigger risk. That translates into both a higher interest rate and closer scrutiny of the borrower.

TS: For a long time they didn't, and historically, putting 20% down was the standard. But times have changed. Interest rates are up, property values are up, and we're not as good at saving as our parents were. Lenders needed to get creative in order to expand the pool of potential borrowers. Remember, they don't make money unless they lend money, so although there's more risk involved with 100% financing, it also opens the door to many more customers.

TS: As with most investment decisions, it depends on your particular situation.

If you have limited cash, or you want to have money in the bank after the closing, then 100% financing may be a good idea. After all, any time you buy a property there are immediate expenses that go along with it. Even if it means going to Home Depot to buy a few garbage cans, you'll need some cash left over to get set up.

But keep in mind that with 100% of the mortgage financed, your monthly payments will be higher. So before jumping into this, make sure you've run the numbers and have a good handle on your cash flow and expenses.

TS: 100% financing is a viable option for many people. If you have the cash flow and discipline to make the numbers work, and don't mind the added complication of managing multiple mortgages, it's a very reasonable way to invest in a property while keeping excess cash in the bank.

Trish Signet, Loan Officer, Summit Mortgage. With over 10 years experience in the mortgage business, Trish works with each and every client to identify the mortgage financing options that are best suited for both their short and long term financial goals. She may be reached at 781-541-6410, tsignet@summitmortgage.com or online at Summit Mortgage.