A 100% financing mortgage allows for purchasing a home without a down payment, but other costs like inspection, appraisal and closing fees still apply.
If you’re ready to buy a home and want to immediately start building equity, a 100% financing mortgage can offer the opportunity to do so faster than traditional home buying methods. This mortgage type doesn’t require a down payment, making it easier for a wide range of homebuyers to purchase a property.
“There are a few caveats to be aware of, so they are definitely not for everyone,” says mortgage broker Reed Letson, owner of Elevation Mortgage. “I always tell my clients that free money is never free and the entity offering up the down payment is in the business to make money off the money they are lending to you.”
While you’ll still need funds for closing costs, in some cases, 100% financing mortgages will roll those costs into the loan. Read on to understand how these mortgages work and whether they’re a good fit for you.
What is a 100% Financing Mortgage?
A 100% financing mortgage, sometimes called a down payment assistance loan, means that you don’t have to make a down payment to purchase a home. You will, however, usually have to pay for inspection, appraisal and closing costs, which can cost more if you choose not to make a down payment.
“Down payment assistance loans will always come with a higher interest rate (on average 0.5%-1%) above current market rates, depending on credit score, as lenders deem these higher-risk loans,” Letson says. “Second, closing costs are typically higher on these loans, on average about 1%-1.5% of the loan amount higher than your standard closing costs. This is due to the origination or discount points the lender adds to your loan fees to build in additional profit”
Pros
- Allows you to buy a home quicker
- Keeps more cash in your hands
- Easier to qualify
Cons
- You’ll get less equity in your home
- Higher fees and interest rates
How Does a 100% Financing Mortgage Work?
A no-down-payment mortgage works like a conventional mortgage, except that you aren’t required to make an initial down payment to secure the loan. The most common forms of no-down-payment loans are government-backed Veterans Affairs (VA) or U.S. Department of Agriculture (USDA) loans.
Suppose you plan to purchase a home that costs $300,000. If the loan requires a downpayment, you can expect to pay between 3% and 20% down, which means you’ll need savings of $9,000 to $60,000. With a no down payment mortgage, you could get a mortgage for the full $300,000 and pay it back over time with interest.
Should I Get a 100% Financing Mortgage?
While a 100% financing mortgage can open the door to more people trying to buy a home, there are some details you should be aware of. For one, you might get stuck with a higher interest rate. If your lender isn’t willing to roll closing costs into your loan, you might also have to pay more than if you put in a down payment.
Additionally, most 100% financing mortgages are only available for government-backed loans.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Reed Letson, a mortgage broker and owner of Elevation Mortgage in Colorado.
Frequently Asked Questions
What does 100% financing mean for a home?
A 100% financing mortgage refers to a home loan that doesn’t require a down payment. While this sounds good, buyers will likely be charged a higher interest rate and may incur steeper closing costs than if they made a down payment on a property.
What credit score is needed for 100% financing?
Most 100% financing mortgages require a credit score of 580 or higher.
Does FHA allow 100% financing?
Yes, the Federal Housing Administration allows 100% financing mortgages as long as you meet all other lender eligibility criteria.
Sources
- Reed Letson, mortgage broker and owner of Elevation Mortgage
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.
