100% mortgages were hugely popular mortgage products for UK house buyers throughout the property boom years which covered the period from the turn of the millennium through to the credit crunch crash in the autumn of 2008. They enabled people to purchase a property without having to save and pay a hefty deposit at the point of purchase as the mortgage loan would cover the full value of the property being purchased.

People who would otherwise be renting were enabled to get onto the property ladder rather than continue to pay rent to a landlord, which many considered to be ‘dead money’. The vast number of people who purchased their first property in the first seven years of the new millennium by utilising a 100% mortgage may not otherwise have been able to get on to the property ladder at all had this type of mortgage product not existed. In fact, it has been said that as many as 40% of people who purchased their first property in the years proceeding the credit crunch would not have been able to do so at all under post credit crunch lending conditions.

However, despite the obvious benefits of 100% mortgages and their rise to popularity, they have always been inherently risky mortgage products, both for borrower and lender. Mortgage lenders and borrowers are protected by the equity margin in a property. That is the margin of value over and above any mortgage or loans secured against the property. With 100% mortgages there is no margin of equity at all, as the mortgage is equal to 100% of the property value. Therefore, if the property goes down in value the outstanding mortgage will be greater than the value of the property itself. This is known as ‘negative equity’, and means that the property asset is worth less than the mortgage secured against it. This is clearly not a good situation for either the borrower or the mortgage provider.

During the boom years mortgage lenders had a voracious appetite for lending, and competition for new lending business was great. Lenders started to take more and more risks in order to win business. The rise of 100% mortgages came about during this boom period, when lenders cared more about securing new lending business than the risks they were taking with some of the mortgage products they were offering. It can also be said that borrowers also turned a blind eye to the possibility of house prices turning, and therefore were willing to take the risk of purchasing a property without a deposit. People wanted to buy properties, expected them to continue to rise in value and many people have suffered since that all changed as a result of the credit crunch.

Although 100% mortgages have not been ‘banned’, there are currently no 100% mortgage products available to UK borrowers and this trend looks set to continue. If a lender were to launch a new 100% mortgage product, it would be very controversial. However, despite allowing mortgage lenders to offer higher loan to value mortgages if they wish, the regulator has now put into place more stringent capital adequacy requirements which make this type of mortgage much more expensive and far less viable for mortgage providers.

Will 100% mortgages ever return? It is unlikely in the foreseeable future, but who knows what may happen once the economy is back on track and the credit crunch is a distant memory. One thing is for sure, if 100% mortgages did return there would be lots of first time buyers ready to utilise them again. But for now, they are gone and that is probably for good.

If you’ve ever purchased or refinanced a home you likely have first-hand experience on just how elaborate the process can be. Certain lenders may follow Freddie Mac’s guidelines, others Fannie Mae’s, while portfolio lenders may have their own set of underwriting criteria. There really is not a “one size fits all” checklist of guidelines when it comes to financing investment homes. Yet, there are some common themes which most lenders tend to follow. Below is a list of some of what you can expect during the rental property loan process.

Preparation – Like with any residential home loan, lenders are going to want to see proof of income, employment, and review a borrower’s credit history to ensure the applicant is in good financial standing and will have a solid chance to remain so. Be prepared to document several weeks or months worth of pay. Paystubs should include the date range of pay (ie. day-month-year to day-month-year). For self employed borrowers, two years of tax returns is the norm. If you plan on using rental income to help qualify, you’ll likely need to show that income in your tax returns. Basic rule of thumb…if it’s not reported, you’re likely not going to be able to use it.

Down Payments – Back in 2005 there were lenders out there who where offering zero down investment property loans. Fast forward to 2011 and most lenders now require at least 15% down (see Fannie Mae Purchase Guidelines 2011). The majority of the lenders that we talked to for this article stated that they require 25% down for purchases and no cash-out refinances.

Credit Score Requirements – Credit guidelines will vary between lenders. According to Fannie Mae’s 2011 product matrix, borrowers must have credit scores of at least 680 for the purchase of a single family investment property if they are putting down 15-25%. If they are putting down more than 25%, 620 is the floor. For other investment property scenarios most of Fannie Mae’s minimum credit scores fall in the 660-700 range. You’ll need to consult with a licensed mortgage professional to verify credit requirements.

Number of Units – Both Fannie Mae and Freddie Mac will finance residential investment properties with 1 to 4 units. Guidelines for 1 and 2 unit properties are often less conservative than those for 3 and 4 unit homes. Often times the greater number of units corresponds to higher credit score requirements and larger down payments. Anything over five units is typically considered a commercial property and a commercial financing instrument would be needed. Commercial loans tend to have more conservative lending guidelines than those applied to residential loans. Because many lenders portfolio their commercial loans, there can be a greater potential for more creative financing options.

Using Existing Rental Income to Qualify – Various lenders will have different criteria on how rental income may count. Many lenders require a two year rental history, and the income must be reported in a tax return. Obviously if a person is seeking to purchase a rental property this is not going to be an option. There are lenders out there who may count rental income if a buyer has a signed lease and has collected a security deposit and one month’s rent. Sounds tricky, it can be.

Financing rental properties can be more intricate than what you might expect from buying or refinancing a primary residence. The good news is that there are plenty of lenders, brokers, and banks out there who are ready, willing, and able to assist buyers and rental property owners. Contact a licensed and reputable mortgage professional in your area to gain greater insight into what it takes to buy and refinance investment properties in today’s marketplace.