No Money Down And High Loan-To-Value Home Purchases

This article helps to explain purchasing a home with little or no money down for the homebuyer or investor.

In many cases it is difficult to obtain financing with little or no down payment. The lender will usually look for very high credit scores and a very thorough payment history. In some cases it may be easier than one would think. Twenty years ago it was always a rule of thumb that one needed to put down at least 20% in order to purchase a home. Last year over 40% of home purchases were made at 100% loan to value.

One reason that people avoid high loan-to-value loans is the fact that a lender will require mortgage insurance if the loan-to-value ratio exceeds 80%. Loan to value is the ratio of the loan in comparison to the value of the home. For example:

Home Value = $100,000 Loan Amount = $80,000 Loan-to-Value ratio = 80%In this example the loan to value ratio is 80% because the loan amount is 80% of the value of the home. Mortgage insurance is a policy that protects the lender in the case of default by the borrower.

One way around mortgage insurance is to take out what is called a piggy back loan. A piggy back loan is taking out a first mortgage for 80% of the value, in the case of the example $80,000 and a second mortgage for the remaining 20% which would equal $20,000. You are now in a situation where you have a 100% financing situation but are not open to mortgage insurance. Generally the interest rate on a second mortgage is higher than the interest rate on the first mortgage, but the difference is less expensive than what the mortgage insurance would cost.

Another way to finance a home with very little money down is to work the closing costs into the scenario. A lender will generally allow a seller to pay a certain amount of the closing costs. This allows for a higher loan to value ratio.

High-Loan-To-Value loans allow both home buyers and investors to keep cash on hand for home improvements or other investments and are a great way to purchase a home without large amounts of cash on hand.

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