For the purchase of a house or a condominium, many people use construction financing. With a certain equity portion complications arise only rarely. Thanks to the so-called full financing, however, it is also possible without equity to fulfill the dream of their own four walls. But how does full financing or 110-percent financing work?? What advantages and disadvantages await the borrower? And what other things to look out for in home financing with no equity to avoid problems?
The times when it was virtually impossible to afford your own home without your own money are long gone. Because nowadays many banks offer the possibility of a construction financing completely without equity capital to carry out. The entire purchase price and, depending on the type of full financing, all ancillary purchase costs, such as notary fees and broker commission, and costs for the entry in the land register are financed by the credit institution with a real estate loan. However, home financing without equity is subject to certain requirements that the borrower must meet. In addition to the advantages, there are also disadvantages and risks that should not be underestimated in the case of construction financing without equity capital.
Good to know: Borrowers with a high and secure income (and thus a good credit rating) have significantly better chances of obtaining full financing without an equity component.
What are the advantages and disadvantages of full financing?
Who wants to handle the purchase of a house or a condo via a full financing, should compare the advantages and disadvantages in advance. The following list is deliberately kept general, because in a construction financing without equity must take into account personal and individual factors that can vary greatly from borrower to borrower.
The advantages of real estate financing without equity
Since the bank usually requires high repayments in the case of full financing, the borrower is debt-free sooner.
Construction financing without equity can be more sensible in times of low interest rates than standard financing with equity in a period of high interest rates.
Full financing also enables young families and single people to move into their own four walls – provided their creditworthiness is good.
In the case of real estate financing without equity, there is no need for a savings phase, which can take several years.
The disadvantages of full financing
The monthly financial burden is significantly higher for real estate financing without equity, because the repayments are at least three percent.
In addition to the high repayment rates, borrowers with full financing must also reckon with a risk surcharge for the ancillary acquisition costs.
The interest costs are also higher than with a construction financing with equity – often two to three times as high.
Not all banks offer full financing, which limits the choice of financing partners.
To get full financing, a secured income and a near-perfect credit score are required.
If the financing does not work out and the property has to be foreclosed on, the risk of being stuck with high debts is significantly increased with full financing.
What are the full financing types?
There are two types of construction financing with no equity: 100 percent financing and 110 percent financing. Whereas with 100 percent financing only the actual purchase price of the house or condominium is financed by the bank loan, 110 percent financing also covers all ancillary purchase costs. An additional (private) loan is therefore not necessary. However, the additional financial cost of 110 percent full financing also increases monthly interest and repayment costs. Therefore, it is advisable to list all cost items and calculate whether you can service the monthly liabilities in the long term.
Are all properties suitable for full financing?
Since the risk for the bank increases with a full financing, most credit institutes place special requirements not only on the borrower, but likewise on the real estate concerned. For the house or condo to act as collateral, the property should be in a very good location. Because the higher the chances of a quick resale, the more willing the bank is to provide construction financing without equity. In the case of condominiums, the furnishings also play an important role, as it is also easier to resell a modernly furnished apartment in the event of a foreclosure auction.
What requirements must the borrower meet for full financing??
Most banks place high demands on borrowers before allowing them to obtain full financing without equity capital. For one thing, the borrower has to be able to make a high monthly repayment payment. This is known as the 40 percent rule. Accordingly, the monthly installment may not exceed a maximum of 40 percent of the monthly income. So if the monthly payment (principal plus interest) is, say, 1.500 euros, the net income of the borrower must be at least 3.amount to 750 euros. This is why banks favor borrowers with a secure, high monthly income. On the other hand, the borrower must have an impeccable Schufa register without negative entries for a full financing. Here, the higher the Schufa score, the better the chances of getting a construction loan without equity capital.