Everything You Need To Know About 100 Percent Mortgage Loans

Getting a mortgage to buy a home is one of the biggest financial decisions you’ll make in your life. For many buyers, the biggest obstacle is coming up with a down payment, which is often 10-20% of the home’s purchase price. This can equate to tens of thousands of dollars that you need to have on hand before you can qualify for a mortgage.

That’s why 100 percent mortgage loans, also known as “no money down loans” or “zero down payment loans,” are so appealing to homebuyers. With a 100 percent mortgage, you can get financing to cover the entire cost of the home without needing any money for a down payment

In this comprehensive guide we’ll explain everything you need to know about 100 percent mortgage loans including

• What are 100 percent mortgage loans?
• How do 100 percent mortgages work?
• Pros and cons of 100 percent financing
• Types of 100 percent mortgages
• Qualifying for a 100 percent mortgage
• Alternatives to 100 percent financing

What Are 100 Percent Mortgage Loans?

A 100 percent mortgage loan finances 100 percent of the home’s purchase price. Instead of requiring a down payment like most conventional mortgages, a 100 percent loan covers the entire cost of the home.

With a 100 percent mortgage, buyers can purchase a home without needing to save up thousands of dollars for a down payment beforehand. It makes homebuying more accessible, especially for first-time homebuyers who haven’t had years to accumulate savings.

100 percent mortgages are also known as:

• No money down loans
• Zero down payment loans
• 100% financing loans
• No down payment mortgages

The key feature of these loans is that they require no down payment to buy a home. The loan amount borrowed is equal to 100% of the purchase price.

How Do 100 Percent Mortgages Work?

While 100 percent financing makes it possible to buy a home without a down payment, these mortgages work much like other conventional loans with a few key differences:

Loan Amount – Since there is no down payment, the loan amount borrowed is 100 percent of the home’s purchase price plus any eligible closing costs.

Interest Rates – Interest rates may be slightly higher compared to mortgages that require a down payment.

Mortgage Insurance – Private mortgage insurance (PMI) is usually required and the monthly premiums can add to your payment costs.

Debt-to-Income Ratio – Lenders look closely at your income, debts and credit score to ensure you can afford the mortgage. Debt-to-income ratios around 43 percent or lower are preferred.

Homebuyer Education – Most 100 percent mortgage programs require completing a homebuyer education course.

Occupancy Requirements – Most 100 percent mortgages require you to use the home as your primary residence.

Loan Limits – There are maximum loan limits, typically up to $510,400 for a single-family home. Jumbo 100 percent financing over that amount is harder to find.

While 100 percent mortgages make it possible to buy without a down payment, keep in mind you are borrowing more which results in paying more interest over the life of the loan. You also start out with no immediate equity in the home.

Pros and Cons of 100 Percent Financing

Before deciding if a 100 percent mortgage is right for you, weigh the advantages and drawbacks:

Pros

• Requires no down payment
• Makes homebuying more affordable, especially for first-time buyers
• Allows you to buy sooner rather than saving for years
• May have lower mortgage insurance costs than FHA loans
• Builds home equity and wealth faster by buying now

Cons

• Higher interest rates than conventional mortgages
• Monthly mortgage insurance premiums add to payment costs
• No immediate equity in the home like with a down payment
• Potentially more interest paid over the loan term
• Stricter credit score and debt-to-income requirements
• Limited options and availability

While 100 percent financing has its benefits, it also comes with costs and risks to weigh against conventional financing. But for buyers who don’t have down payment funds saved yet, it can be the difference between buying now or waiting years to save up.

Types of 100 Percent Mortgage Loans

There are several types of mortgages that offer 100 percent financing:

Conventional 97 – Conventional mortgages that allow 100 percent financing with 3% gifted funds.

FHA Loans – Federal Housing Administration insured mortgages that require just 3.5% down but allow gifted funds for that amount.

VA Loans – No down payment required for eligible veterans. Funding fees apply.

USDA Loans – 100% financing available in designated rural areas. Income limits apply.

HomeReady & HomePossible – Down payment assistance programs from Fannie Mae and Freddie Mac.

State and Local Programs – State, city and county programs provide down payment assistance in the form of grants, silent seconds loans and more.

Lender Programs – Some lenders offer their own 100 percent mortgage programs and products.

Family Assistance – Gifted funds from relatives are allowed for most mortgage down payments.

Shop around and compare mortgage options to find the right fit for your budget and financial situation. Government insured programs like FHA and VA loans offer 100 percent financing options, while conventional lenders are increasingly offering 97 percent financing programs.

Qualifying for a 100 Percent Mortgage Loan

While 100 percent financing removes the hurdle of a down payment, there are qualifying standards you must meet:

Credit Score – Most lenders require a minimum credit score around 620 or higher. The better your score, the better your chances of approval.

Debt-to-Income Ratio – Your total monthly debt payments, including the new mortgage, should be less than 43% of your gross monthly income.

Steady income – Documented stable income from employment or other sources. Two years of employment in the same field is ideal.

Homebuyer education – Completing an approved homebuyer education course is required for most programs.

First-time homebuyer status – Some 100% financing programs are limited to first-time buyers only.

Property type & loan limits – Single-family homes and condos are generally approved, and loan limits apply.

Good payment history – Most programs want no late mortgage or rent payments in the last 12 months.

Reserves – After closing costs, expect to have 2-12 months of mortgage payments in reserves.

Occupancy requirements – You’ll need to use the home as your primary residence.

While 100 percent financing is more accessible than conventional loans, make sure you can comfortably afford the monthly payments including mortgage insurance, property taxes, insurance and maintenance costs.

Alternatives to 100 Percent Financing

If you don’t qualify for a 100 percent mortgage, there are alternatives that can help you buy with less cash upfront:

Low down payment mortgages – Conventional loans allow as low as 3% down for well-qualified buyers.

First-time buyer programs – State and local down payment assistance grants and loans.

VA loans – No down payment needed if you or your spouse served in the military.

USDA loans – 100% financing for low-income buyers in rural designated areas.

FHA loans – Just 3.5% down required and gifted funds allowed.

Family assistance – Ask relatives for help with some or all of the down payment.

Down payment savings options – Employer assistance programs, stocks/bonds, retirement savings.

Seller concessions – Ask the seller to cover some of your closing costs.

Lender credits – Negotiate with lenders to cover closing costs.

Piggyback loans – Combine a first and second mortgage instead of a down payment.

With a little creativity, you may be able to buy with far less cash than you realized. Don’t give up easily – explore every option to make homebuying affordable.

The Bottom Line

While scarce, 100 percent mortgage loans fill an important niche – making homeownership possible for buyers who lack the savings for a traditional down payment but can still comfortably handle monthly mortgage payments.

These zero down payment loans remove a significant hurdle to homebuying. But they also come with stricter qualifying standards, higher interest rates and required mortgage insurance.

Weigh the pros and cons carefully for your situation. Get pre-approved to see if you qualify. And shop around for the best 100 percent financing option among lenders, agencies and programs.

With the right approach, 100 percent financing could be your ticket into homeownership now rather than trying to save up for years.