The concept of 95% mortgages is that the borrower will be able to avail a loan on 95% of their property’s value and the rest 5% can be used to pay the deposit. In this type of mortgage the applicant will need to make a down payment of 5% only. Hence, you get financing for 95% of the purchase price. Thus, the Loan-to-value (LTV) ratio becomes 95% when the customer opts for this type of Mortgage.
Benefits of 95 Mortgages
The first benefit that customers get from 95 Mortgages is that the down payment is relatively low. Earlier before the financial crisis in the early 2000s, this 5% was considered on the higher side of down payment. There were numbers of loan available with zero percent down payments. However, after that the scenario has changed and Banks have levied strict lending criteria. Hence, if customers can avail mortgages with only 5% down payment, it is always going to be a huge financial gain. It is more helpful for the first time buyers as they do not have much savings on hand and loans with low upfront cost are always beneficial.
The primary benefit of this loan is that the customers have to pay a small amount in the form of deposit but there are a few disadvantages too. As the deposit cushion is smaller than the other loans, these loans are considered to be riskier. In case there is a drop in the property’s value, which is higher than 5% then the mortgage would be higher than the property – this result in negative equity. This will eventually lead to a situation where the borrower will not be able to move house or even remortgage for another deal.
Since the risk levels for these loans are higher, the interest rates too are higher, which implies that the applicants have to reassess their financial position if they want to repay the loan without any hiccups.
How to qualify for 95 Mortgages?
When an applicant submits a loan application, they would find that different banks have different requirement. However there are certain things which are common to all the banks. Every Bank would verify the Credit score and income documentation before they finalize whether an applicant would qualify for the 95% loan. Applicants with low credit score may not get financing from the Banks, they may have to get it from other financial institutions. Buyers with good credit score can however qualify for 5% down payments provided their income is good enough to support the repayments.
Yes, for getting a home loan, income documentation is the most important criterion. During the process of granting the loan an applicant would be asked questions about their income. And it would be verified by the Banks again and again. Thus the applicant needs to ensure that they provide thorough and accurate income information. Salary details of the salaried individuals are going to be considered as a proof of income. The bonus or overtime income would not be considered. They need to submit proper documentation in support their income to the loan granting authority.
People who are planning to purchase a home with minimum down payment can always opt for the 95% mortgage.