What is 100% LTV mortgage?

If you're researching a 100 percent loan-to-value (LTV) mortgage, chances are you're getting this quote from a mortgage broker or a mortgage lender looking to pitch you on a second mortgage, rather than a home purchase or first mortgage. These so-called high loan-to-value mortgages or no equity mortgages, which can range anywhere from 97 percent LTV to 125 LTV or 150 LTV, are exactly what they sound like - loans where the principle of the second mortgage exceeds or matches the appraised value of your home. For example, if your home was appraised at $125,000, a 100% LTV mortgage would be a loan with a principle of $125,000. Note, this is the appraised value of your home, not the purchase price. There are obvious risks to a 100% LTV mortgage, both to you and the lender. But first, let’s talk about the benefits.

100 Percent Loan-to-Value Mortgage Benefits

There are few good reasons to get a 100% LTV mortgage or home equity loan. You shouldn’t get a 100% LTV mortgage to pay for a vacation or any other luxury. But if you need to make home repairs, consolidate debt, pay for education or make some other money-saving investments, a 100% LTV mortgage can be incredibly helpful. Because your 100% LTV mortgage is secured against your property, you’ll pay a much lower interest rate than you would for a personal loan or a credit card. But there are some serious risks with a 100% LTV mortgage.

100 Percent Loan-to-Value Mortgage Risks

The obvious risk of borrowing 100% or more of the value of your home is the very real danger of winding up underwater on your home mortgage. That is, owing more on your mortgage than your home is worth. By getting a 100% LTV mortgage - especially as a second mortgage - you’re immediately stepping right up to that fine line or directly over it. So, if your home value depreciates for any reason, you’re upside down on your mortgage. Even if you sell your home, you’ll still fall short of paying off your mortgage, which means home foreclosure is nearly a foregone conclusion.

Qualifying for a 100% Loan-to-Value Mortgage

You’ll need an excellent credit score to qualify for a 100% LTV mortgage. Once upon a time, you could get 100% financing on a second mortgage with a score of about 600, but in the wake of the mortgage crisis, that number is much, much higher now. You’ll also have to prove your income by furnishing W-2s, tax returns and business profit/loss reports. What lenders will be looking for is whether or not you’ll be able to cover all of your debt obligations with your monthly income level.

Types of 100% Loan-to-Value Mortgages

The most advantageous 100% LTV mortgage is the FHA-sponsored VA loan mortgage, which is only available to veterans. For non-veterans, there are also similar products, such as the $0 down payment or the no down payment mortgage. These are 100% LTV mortgages where the closing costs and origination fees are also financed. As such, these loans may actually exceed 100% LTV.

Loans that are over 100% LTV are actually known as hybrid mortgages. That’s because only a part of the loan is actually secured by your home’s value. The portion of the loan that exceeds the 100% LTV is, essentially, a personal unsecured loan.

No matter what type of 100% LTV loan you get, the interest rates and closing costs are likely to be higher than a conventional mortgage loan (perhaps with exception of a VA loan). And of course, the risks of winding up underwater on your home mortgage are great as well. Your next step in securing a 100% LTV is to take careful stock of your financial situation and your financial goals for the coming months and years and talk with a qualified mortgage broker or mortgage lender who has your best interests in mind.