Qualifying for a 100 percent mortgage was simple during the housing bubble. Credit scores were irrelevant because money was available and the loans were insured by government-chartered agencies.
However, obtaining a 100 percent investment property loan has become nearly impossible since the credit crunch catastrophe and its subsequent recovery.
Consequently, to acquire a home look with no down payments, buyers must rely on inventive financing outside of typical lending practices.
Wraparound Financing in Real Estate
A wraparound mortgage solves the challenge of getting a typical loan by way of transforming the seller into the bank. For instance, a seller has a duplex with a $100,000 mortgage, he gets $150,000 for the house. So instead of securing a new loan for the full amount, the seller wraps the $50,000 difference around his current $100,000 mortgage, and the buyer pays the seller immediately. The seller keeps ownership of the property and continues to make his mortgage payments to his lender.
Second Mortgage Held by the Seller
If the buyer’s mortgage loan does not cover the entire purchase price, the seller can agree to hold a mortgage for the remaining amount. For instance, a property may sell for $200,000, but the buyer’s mortgage financing only covers $160,000, the seller may agree to hold a second mortgage for the remaining $40,000.
The seller forfeits all ownership rights to the property after the second mortgage is published in the public records. If the buyer defaults on the payments, the seller has the right to foreclose on the second mortgage.
Piggyback Mortgage in Real Estate
In real estate, a piggyback mortgage is a second loan that closes at the same time as the first. A buyer, for example, is interested in purchasing a $450,000 apartment building. He obtains a $400,000 mortgage loan, leaving a balance of $50,000. The buyer can acquire a second mortgage from a different lender if the home has enough equity.
In most cases, piggyback mortgages have a higher rate of interest than primary mortgages. Piggyback mortgages are normally for a shorter period and may include a balloon payment at the end of the loan.
Independent Mortgage Insurance Provider
One other way to go is if you can’t receive a piggyback loan and the seller financing isn’t an option, a lender may issue a 100% mortgage loan if the borrower agrees to pay PMI. If the borrower defaults on his payments, PMI protects the lender. PMI is a monthly payment that is added to the mortgage amount and paid by the buyer. The lender may abolish the PMI if the buyer makes on-time payments for several years or pays down the loan debt sufficiently.