No Ratio Loans
Author: Ryann Cairns
When borrowers seek a mortgage loan, they typically are required to commit between 10% and 20% of the value of the home in the form of a cash down payment. However, the last few years have seen a veritable explosion in home prices, and that has priced many borrowers who would otherwise qualify for a mortgage loan out of the market.
No ratio loans allow a potential home buyer to take out a mortgage with little or no money down. The no ratio loan is still relatively new to the market, and many traditional lenders still insist on at least a 10% down payment for a home loan. However, the market for no ratio loans has begun to grow, and that will probably continue as home prices rise.
With the average home now selling for nearly $200,000, it is likely to become even more difficult for the average home buyer to come up with the tens of thousands of dollars it takes to muster a 20% or even a 10% down payment. The growth of no ratio loans has been aided in part by the ever increasing value of homes. Home prices have been rising by more than 10% a year for the past several years, with home prices in many hot markets rising by 20%, 30% or even more annually over the past several years.
What this means to home buyers is that they can build equity in their homes very quickly, even with no money down up front. This situation is a great deal for both the borrower and the lender, as long as home prices continue to rise. The home buyer is able to afford the home they want even if they cannot come up with the money for the down payment. They are able to get into the home, start building equity, and even make a profit if they sell their home due to the increasing home values in the market.
At the same time the lenders are able to make money by writing mortgage loans for buyers who may not have qualified under the old 20% down rules. No ratio loans allow this segment of the market to qualify for mortgages and make money for the lenders and mortgage brokers. This situation could become more difficult if home prices begin to fall, however.
While it is unusual for home prices to fall precipitously, it has happened in the past and it is worth thinking about. It is still a good idea for a potential home buyer to do their very best to put as much down on their new home as they possibly can. A no ratio loan is a good option in the right situation, but a high down payment is still the best strategy when buying a home.