Is It Possible to Get a Mortgage with No Money Down? - One of the main reasons why the housing bubble burst was that many prospective buyers were approved for mortgages that they couldn't afford and didn’t have to put any money down for them. In fact, subprime lending led to an unprecedented amount of foreclosures and short sales around the country.
So, after the housing market's collapse, lenders became much stricter with their policies and became much pickier about who they approved for a home loan. Over the last few years, it has become almost impossible to get a mortgage without a significant down payment. Most private lenders require at least 10% down, but prefer a 20% down payment.
But now, are banks back to writing loans without any down payment?
So why would a lender agree to a mortgage with 100% financing when they know that these types of loans are partially to blame for the housing market's bust a few years ago? Because they say they're being smarter about who they approve for these types of loans.
During the housing market's boom, no money down meant exactly that – a borrower could come in and receive a loan without putting any cash on the table. That became the popular choice among lower income Americans who wanted to own a home, but didn't have the income to make a down payment.
Now, 100% mortgages are only available to borrowers with significant assets. These types of loans typically require two different types of collateral – the home itself and a portion of the borrower's investment portfolio. That way, if the borrower defaults on the loan, they lose part of their assets, in addition to their home. Because their investments are at risk, the borrower is far less likely to get behind on their mortgage.
In most scenarios, the lender approves the loan for 60-80% of the home's value, with the remaining portion secured by investments. The assets they use to qualify for the mortgage get to remain fully invested, earning returns like all of the other “traditional” assets they have. So, as long as they make their monthly mortgage payment, the borrower's long-term investment goals aren't affected one bit. But, once the borrower defaults on the loan, his assets get transferred to the bank.
Lenders say these types of mortgages only account for a small percentage of all home loans, but requests for 100% financed mortgages are on the rise.
Why? There are several reasons.
These affluent buyers can obviously afford to make the traditional down payment, but are choosing not to because this option allows them to purchase the home without making a cash withdrawal from an interest-earning account.
And, because the stock market is gaining while interest rates remain near all-time loans, some borrowers have discovered that the return on their investments is bigger than the rate they are paying on their home mortgage – meaning the money they’re making on their investments is paying for the interest on their mortgage!
Another incentive to go this route is that these home loans provide several tax benefits. Since borrowers don’t have to liquidate their investment portfolios to qualify for a mortgage, they can avoid paying the capital gains tax. And, depending on the size of the loan, they can still take advantage of the mortgage interest deduction. So, they get double the tax perks!
There’s also less red tape to get caught up with. Since the banks view lending to this type of clientele as low risk, many lenders are approving the loan applications relatively easily.
So, is it possible to get a mortgage with no money down? Yes – just not in the way you might have thought when you first started reading this article!
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