100% Financed Mortgage Loans: The Risks and The Benefits

It might seem that the promise of 100% financed mortgage loans is a blessing to any bad credit borrower looking to buy a new home. After all, for many, the biggest challenge is in actually saving up the down payment, not in securing the mortgage itself. But it is important to realize there are pros and cons to the deal.True, there are definite problems solved, and if it is possible to get mortgage approval with bad credit, then it is certainly difficult to pass up on the chance. But a mortgage is a long-term commitment, and one that can prove extremely costly if things go wrong. Knowing what compromises need to be made is important.So, what are the risks that a borrower takes on when securing 100% mortgage loans, and what are the true benefits? Here are some of the factors that need to be considered before taking one on.The RisksAs with all financial deals, there is a certain amount of risk involved in taking on 100% financed mortgage loans. For a start, the size of the loan is much higher, increasing the size of the monthly repayments and, as a consequence, the financial pressure on the borrower.The increase in payments can translate to tens of thousands of dollars over the lifetime of the mortgage. And with higher payments, the excess income available might not be enough to stay within the 40% expenditure limit set by the debt-to-income ratio. As a result, getting mortgage approval with bad credit becomes more difficult.Also, with a mortgage loan that represents 100% of the value of the property, the borrower has no equity. This means that, should there be an issue with finances in the future, the homeowner would be in a weaker position, with less security at their disposal to secure a large loan.The BenefitsThe benefits of securing 100% financed mortgage loans are not too difficult to work out. As already mentioned, a down payment is not needed, which lifts a major pressure off the shoulders of the applicant. Normally, mortgage providers set a limit of up to 95% funding, meaning the applicant needs to raise at least 5% of the purchase price themselves.On a property worth $200,000, this translates to $10,000, and most buyers require about 2 years to save that kind of money independently. Of course, it is possible to take out a personal loan to get the required sum together. But in securing mortgage approval with bad credit, even that pressure is high.Of course, private mortgage insurance can be skipped. This is good news since this kind of insurance is widely regarded as a pointless expense. So, when seeking a mortgage loan, it is better to spend that money on other things.Sub-Prime LendersNot every mortgage provider is willing to offer 100% financed mortgage loans, mainly because of the risks created. But, sub-prime lenders are recognized as the best and more competitive option. Sub-prime lenders specialize in loans to bad credit borrowers, and construct mortgage deals that are more affordable to that niche.For a start, a mixture of fixed and variable rates are charged on the mortgage, providing a structure that allows for lower repayments before raising them after a number of years to a fixed-interest rate.However, the payoff for them is that, in general, the interest earned is higher. So, on the one hand, getting mortgage approval with bad credit is more likely, but the cost of the mortgage loan is greater.