For many people, buying their first home is a daunting task, especially saving for the down payment. Well, that’s no longer the case. Gone are the days of saving 10, 15 or even 20% before enjoying the benefits of home ownership. With the advent of 100% loan programs, many more people are able to leverage their credit and income to buy a home now.

100% financing programs are available for purchase, refinance and debt consolidation on Single Family Residences (SFRs), Planned Urban Development (PUDs), Duplexes and Condos. Below is a list showing the flexibility of 100% financing.

100% Financing Program Highlights*:

- No down payment required
- Available for first-time homebuyers
- Loan amounts up to $875,000
- Credit scores as low as 600
- Interest only mortgage payments available
- No verification of rent or mortgage payment required
- No cash reserves required
- No mortgage insurance required
- Up to 55% debt-to-income ratios allowed
- Seller may pay up to 6% of non-recurring closing costs
- Limited income and no income verification loans available
- One day out of bankruptcy is okay; no seasoning required
- Three lines of traditional credit required, with two-year credit history

* Some closing costs may be required

One of my favorite 100% financing success stories is Patricia Rodriguez (name changed to protect her privacy). Patricia, a young nurse one year out of school making about $60,000 a year, was able to purchase/finance a $270,000 home. When she made her offer she wrote a check for $3,000, all the money she had at the time, as a Good Faith Deposit on the house. Her Real Estate Agent then negotiated with the sellers to credit Patricia $6,000 to cover her closing costs, which many 100% lenders allow. At the time of closing, Patricia actually received a check for almost $1200, buying her first home with just over $1800 out of pocket cash.

As you can see by the above example, there are many advantages of 100% financing. The first and most obvious is becoming a home owner much sooner instead of waiting to save for a down payment. This means that you begin to immediately build equity and earn appreciation, or rise in property value, increasing your net financial worth versus lining the pockets of your landlord. Also, you’re able to purchase a home at today’s market instead of the ever increasing prices of the future.

Below is an example showing the upfront savings with 100% financing compared to a low, 5% down payment, which is significant. The 95% loan-to-value program requires a total of $20,925 to close whereas some 100% lenders require no additional cash to close and “A Paper” (two years employment, full documentation, and excellent credit) 100% financing programs only require two months reserves.

Zero Down Versus 5% Down $300,000 Purchase Price
	100% Financing	“A Paper” 100% Financing	95% Financing
Loan Amount	$300,000	$300,000	$285,000
Down Payment	$0.00	$0.00	$15,000
Impounded Taxes*	$0.00	$0.00	$625
Impounded Ins.*	$0.00	$0.00	$166
Mortgage Insurance*	$0.00	$0.00	$370
2 Months Reserves	$0.00	$4126	$4764
TOTAL	$0.00	$4126	$20925

* Based on a minimum two months reserves. Please note: impounded taxes may be higher depending on when taxes are due and what month the loan closes.

Another example of a 100% financing success story is the Donaldson’s (name changed to protect their privacy), a couple who approached me after one of my monthly First Time Home Buyer Seminars. Although they had excellent credit and made over $100,000 combined income a year, they didn’t have any savings except for retirement accounts. Instead of paying a penalty to access their retirement funds, they raised the number of dependents on their W-4s to net out more money from their paychecks*. Six months later, the Donaldson’s had enough money to make a Good Faith Deposit on the purchase of their $500,000 home. Because of their good credit and employment history, I was able to get them “A Paper” 100% financing with the Donaldson’s paying just over $6,000 out of pocket expenses.

*Please check with your professional tax preparer before making changes to your W-4s.

Another, less obvious benefit of 100% financing is taking advantage of the maximum interest payment deduction on your income tax returns. Even when buyers have a down payment, some choose to finance 100% of their purchase because they want the maximum tax write-off and to have access to their money for other investments and uses, instead of having their funds tied up in their home. Also, many 100% lenders do not require Mortgage Insurance (MI), which compensates lenders for making higher risk (greater than 80% loan-to-value) loans, but is not tax deductible. With 80/20 “Piggy Back” loans, the risk is built into the interest rate, which is a tax write-off. Below is a payment comparison showing the net tax savings of 100% financing versus 95% financing with Mortgage Insurance.

Payment Comparison Purchase Price: $300,000
	100% Financing*	“A Paper” 100% Financing**	95% Financing
1st Loan (80%-$240k)	2/28 @ 5.0% $1288	5/6 @ 5.5% $1363	30 @ 6.5% $1801
2nd Loan (20%-$60k)	30/15 @ 8.0% $440	HELOC @ 6% $300	PMI (.78%) $185
Monthly Payment	$1728	$1663	$1986
Mo. Tax Savings***	$350	$350	$406
Net Mo. Payment	$1378	$1313	$1580
Net Annual Savings	$2424	$3204	$0

* This is an example of a 2/28, which is a two year fixed rate mortgage, which then becomes adjustable for the remaining 28 years. A 30 due in 15 loan is amortized over 30 years with the remaining balance due in 15 as a balloon payment. These loan programs have liberal underwriting guidelines, including alternative income documentation, making it available to just about anyone with credit scores over 600. Both loans have two year pre-payment penalty, which also happens to be the required time to hold a piece of property without capital gain implications. After two years, many borrowers either refinance or sell their starter home rolling their equity into their next home.

** The second example of “A Paper”100% financing. It is an 80/20 loan with a five year fixed first and a HELOC (Home Equity Line of Credit) second. The first loan has fixed interest rate/payments for five years and then becomes adjustable. This is perfect since most first time home buyers usually sell 5.5 years after purchase. The HELOC loan is an adjustable rate mortgage that’s generally tied to prime plus a “margin” depending on your credit score. It is a popular choice because often times the interest rate is lower and the loan acts like a credit card that you can be pay down and borrow against for a set period of time.

*** Based on 25% Tax Bracket (2004 Tax Rate Schedule - Single Person earning between $29,050 - $70,350). Please check with your professional tax preparer to determine your specific tax benefits of home ownership.

Many 100% lenders also offer Interest Only loans, which can further reduce payments. This allows for the second loan, which generally has a higher interest rate, to be paid off faster and before you pay down your first loan just like you’d pay off a higher interest rate credit card first. In addition, lower payments help buyers qualify for higher loan amounts so they can purchase more home now. Below is an example of lower monthly payments and savings available with Interest Only (I/O) loans.

100% Financing	I/O 100% Financing	“A Paper” 100% Financing	I/O “A Paper” 100% Financing
2/28 @ 5.0% $1288	$1000	5/1 @ 5.5% $1363	$1100
30/15 @ 8.0% $440	$440	HELOC @ 6% $300	$300
$1728	$1440	$1663	$1400
	$288 Mo. Savings		$263 Mo. Savings

In addition to zero down, many buyers are taking advantage of the 103% and 107% programs. These programs are designed to finance closing costs and the 107% program pays up to 4% of consumer debt as well. Both programs allow buyers to not only purchase sooner, but with the 107% loan a buyer may be virtually consumer debt free at the close of escrow. This program transforms consumer debt into tax deductible interest and sometimes leads to qualifying for higher loan amounts.

The 107% program made all the difference for one young couple, the Espinoza’s (again, the name is changed to protect their privacy). With 103% financing, the couple only qualified for a $500,000 loan because they were still paying off student loans. The problem began when they found the home of their dreams, which happened to cost $517,000. With some quick calculations, I discovered that by paying off their student loans and wrapping them into their mortgage, they qualified for the higher loan amount. The Espinoza’s were ecstatic. They were thrilled to buy the home they really wanted, and to pay off their student loans and have the interest be a tax write off.

Some people are concerned that 100% financing may mean higher interest rates, but that’s not necessarily the case. Even if your credit is less than stellar and/or if you need alternative income documentation, you may be paying slightly higher interest and/or have pre-payment penalties. However, most people find the benefits of the tax write-off and appreciation of home ownership far outweigh the cost. You could wait and save for a down payment, but that day may never come as the price of homes continues to increase. You could be benefiting from a significant tax write-off and earning appreciation instead of making your landlord rich. Why wait?

To attend a First Time Home Buyer Seminar in the Los Angeles area or for more information, please contact Kassie Welch at 310-666-4020 or at KassieWelch@aol.com. Kassie is a seventeen year veteran of the real estate finance industry, with extensive experience in all areas of financial services, from processing to underwriting. In addition to a degree in Business Administration, she holds certifications in appraisal, underwriting and fraud detection/prevention from the Mortgage Bankers Association.