95% Home Loans
What does the term “95% home loan” mean?
When a home is purchased, some lenders will offer a mortgage for 95 percent of the price of the home. Refinance loans are not eligible for this type of loan.
At the closing table, the borrower must provide the other five percent to complete the purchase of the property. In addition to the cost of the property, the buyer must have enough money to cover all closing costs including legal fees and stamp duty.
Do all lenders offer 95% home loans?
Following recent events in the lending markets, banks have reduced the percentage of the home price offered through a mortgage loan. The maximum LVR for most lenders is 90 percent or less. Mortgage lenders are aware that selling the mortgaged security to another institution is not possible when the loan balance is close to 100 percent.
When a 95 home loan is offered, the lender can be left holding the property if the borrower is unable to sustain the payments on the loan. The mortgage insurers carry the risk of loss when a 95 home loan is underwritten. Since the insurers are less likely to insure these high-percentage loans, the banks are unwilling to offer or approve the 95 home loans.
Market competition is driving more lenders to offer 95% home loans!
Mortgage insurance pricing is becoming more affordable for institutions that offer 95 home loans. Since the risk can be mitigated by insuring the mortgage, large banks are more willing to offer a 95 home loan option to borrowers who meet the stringent qualifications.
What causes 95 home loans to vary in cost?
Perceived risk of default will drive up the cost of a 95 home loan. Lenders will require extensive proof of ability to pay from the borrower prior to offering the 95 home loan. If the mortgage insurer charges the bank more money to accept the risk, the price of the loan will increase through the interest rate that is offered. Mortgage insurance costs are passed on to the borrower.
Most lenders have very high requirements to prove that the applicant can afford the loan and will make payments on time. This information is then provided to the mortgage insurer as proof of lower risk.
Contact multiple lenders prior to agreeing to the terms of the loan since mortgage insurance will affect the cost of the loan. The cheapest loan may not offer the best terms in the long run.
Two approaches to lenders mortgage insurance
Lenders follow one of two methods for calculating the actual percentage of the loan offered. The first method includes the cost of mortgage insurance by adding the premium charged to the loan value. This approach will drive the percentage of the loan up to 97 or 98 percent. More risk is carried by the lending institution.
The second method is to require upfront payment of the insurance premium at the time of settlement. This approach ensures that the insurance is paid prior to the completion of the loan agreement.
Many lenders are adopting the second method as part of the proof that the borrower has sufficient funds to afford the loan. Since the loan applicant must qualify for the 95 home loan and then pay the insurance cost, the bank perceives less risk and will underwrite the loan.
Qualifying for a 95 home loan
Since the home loan covers a very high percentage of the home price, the borrower will be required to provide substantial proof of his ability to pay. The application will require detailed information concerning every aspect of the financial history. Even if the applicant can pass the lender’s approval process, the mortgage insurer will be given the opportunity to review the application. High-percentage loans will have more stringent insurance requirements since the perceived risk of default is higher. When the lender is also the mortgage insurer, the terms can be easier to meet.
These are some of the most important qualifications that 95 home loan applicants must meet:
1. Savings habits – Lenders rely on this factor more than any other when considering an applicant’s ability to afford the 95 mortgage. The savings account must contain the entire five percent of the home price and reveal a track record of saving money for at least the previous six months.
Active savings habits that continue during the home loan approval process are an indication to the bank that the borrower has the cash flow necessary to continue to make payments and maintain the property. Some banks will not approve the loan if deposits to the bank account have not been consistent.
If the borrower is not able to prove the existence of genuine savings, the lender will not proceed with the approval process. The perceived risk will be too great to approve the mortgage so the process will stop.
2. Flawless credit history – Lenders require the applicant to have a credit history that has zero adverse comments. There are not exceptions to this requirement when applying for a 95 home loan. Every outstanding debt must be in good standing for the past six months without any late payments.
3. Stable employment – Applicants must have full time employment for the previous 12 months with the same employer. Some exceptions can be made for someone with six months of employment with the same company and more than two years in the same industry. Lenders will accept some other variations.
4. Readily saleable property – The property to be purchased must fall within the standard guidelines set forth by the lending institution. Remote locations, high-rise condominiums, and very small properties will not be considered for high-percentage loans by most lenders. Prior approval of the property will save time and frustration by the applicant and the lender.
5. Age-appropriate asset ownership – Many banks are willing to approve 95 home loans for applicants with steadily growing asset portfolios. If the debt ratio is very high and credit has been used excessively, the 95 home loan is not likely to be approved.
Are there maximum loan amounts for a 95 home loan?
Theoretically, a borrower can find a lender willing to loan up to $1,000,000 at 95 percent of the property price. Since the mortgage insurers set the actual insurance amount for the mortgage security, most lenders have lowered the actual loan amounts to $650,000 in metro areas. For properties located in rural areas, the loan limits are lower because of the speciality properties that exist on the market. At the beginning of the application process, provide the postcode to the lender since the loan limits are tied to property location.
Home mortgage lenders evaluate the entire financial package of the borrower. People seeking to purchase a property worth $1,000,000 or more should be able to save more than five percent of the purchase price. Banks evaluate the ability to repay the loan through a complete financial evaluation and expensive properties will be scrutinized more closely to prevent default on the home loan.
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