Traditionally lenders expected home buyers to have a substantial down payment. This is a way to reduce the risk of default; after all if you have your own money tied up in a real estate deal, you’re less likely to walk away from your obligations.
But there are a number of situations where lenders are relaxing those rules. It is possible, under some circumstances, to finance more than the purchase price of a home. In some housing markets, prices are rising fast and even though the buyer starts out with no equity that changes quickly.
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Young professionals who are just entering the job market might also be interested in this type of loan. Lenders are willing to take on extra risk because they believe in the long-term earning potential of the borrower.
Another time this type of loan makes sense is if you have assets that you don’t want to liquidate in order to come up with a down payment. You might have another home that you want to rent out or you might have stocks that you want to hold on to. In this case, the other assets would be used as collateral for financing the new home and lender minimizes their risk.
If you are purchasing a home that needs repairs and you have money for a down payment, it might make sense to take out this type of loan. You can increase the value of the property and gain a tax advantage by having a big interest deduction.
These types of loans are coming under more scrutiny from federal regulators because they have the potential to cause problems in the industry. One area of concern is where predatory lenders will offer homeowners loans for the entire amount of the asset and when the homeowner can’t make the payments, the owner loses their home.
Another potential problem is that lenders are making loans that don’t have any assets to back them up. When a purchaser defaults on this type of loan, the lending institution loses money. If it happens infrequently, the lender can just make up the losses on other loans. But as this type of loan becomes more common, it brings into question the stability of the entire industry. A sharp downturn in housing prices could mean financial ruin for both borrowers and lenders.
A mortgage is a long-term commitment. Before you sign any loan, look at all your options and make sure you can live with the payments.
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