second mortgage advice
3 Strategies For Buying Property
With No Money Down
Everyone has heard a story or read about someone who
bought a property without paying a single dime as a down payment. But how
does this work?
There are several "classic" methods commonly used to
purchase real estate with no money down. There are an infinite variety of
situations in a real estate transaction that could lead to a deal with no
down payment. But for the sake of reality, I will focus on those that are
most commonly seen in the current market.
1. Seller second - The buyer obtains a new first mortgage
for most but not all of the total purchase price. The seller finances the
Purchase price: $100,000
Buyers loan: $90,000 (90% LTV) (new first mortgage)
Sellers finances $10,000 (in the form of a new second mortgage)
The buyer has borrowed 100% of the purchase price. Thus, you have100%
financing, and no down payment was paid by buyer. This is not a difficult
strategy to employ if the seller has enough equity, is willing to hold a
second, and the first mortgage lender approves.
One thing that is not mentioned in most articles about this strategy is
the requirement for lender approval. The lender who is making the 90% loan
will have to agree to allow the seller to take back a second mortgage. In
cases where the buyer has better credit, this is usually OK with the lender.
But if the buyer has a lower credit score, the lender may not approve of
this. If your credit score is on the lower side, but you have good
documented income, you may still qualify.
Herein lies the fundamental issue that makes it so difficult to write
about your financing options and what to expect: The fact is that lenders
who are making the first mortgages on a property can change the rules or
make new rules in the middle of a deal. Therefore every deal is different.
Every buyer's credit and income are different and lenders vary in their
It is a moving target. So while it can be said that you can get a 100%
loan to buy a property, there are usually specific credit requirements,
income requirements, etc. It makes this game rather unpredictable.
Talk to your lender ahead of time and find out if creative financing
options such as a seller second would be allowed. Make sure you have a
lender who is used to working on investment property loans. Some mortgage
companies only have programs for owner occupants. You need to go to a lender
who specializes in loans for investors.
2. Another common way to obtain a no down payment loan is to utilize one
of the many low or no down payment programs that exist. Many of these are
intended for owner occupants, but some are available for investors. Again,
it is important to talk to the right lender.
If you have an investment property that you want to sell, consider taking
back a second mortgage for 5-10%. This is not a huge amount, and it can help
you sell your property faster.
When it comes to finding a seller who will help you create a no money
down deal, consider buying from an investor who is willing to be flexible.
Some investors are willing to do creative financing simply because they
understand that it helps them sell houses. It never hurts to make an offer
that includes a seller second. You never know until you ask.
There are some points to remember when purchasing investment property
with no money down. A key point is the comparison of monthly payments to
expected rental income. When you are financing 100% of the purchase price,
your payments will be higher. If you have a second mortgage payment to add
to a first mortgage, your payment may be even higher. Be sure your rental
income will cover the entire monthly payment. 3. More common among
professional investors is buying wholesale properties, using hard money to
purchase and rehab.
When the rehab is done, you get a new mortgage that pays off the hard
money loan. Since this is a refinance, you can take cash out of the
property. You may have to bring some money to closing on the hard money
loan, but you get it all back when you refinance, so you end up with no
money out of pocket. This becomes not only a "no down payment" deal, but
also a "cash back at closing" deal.
It works like this:
Purchase price $100,000
Hard money loan $115,000
Purchase and repair, then get new loan to pay off hard money.
New loan is based on 90% of After Repair Value.
For our example, the ARV is $150,000
90% of $150,000 is $135,000.
New loan for $135,000. Subtract hard money loan pay off of $115,000 leaves
You keep the extra $20,000 in cash, tax free since it is a loan, rent
your house out and let the tenant pay the loan back. Your gross profit is
$20,000 cash and $15,000 equity. Total gross profit $35,000. Not too bad for
a couple months work.
Down payment by definition means specifically money that is used to "pay
down" the total purchase price. This does not include money for closing
costs, points, interest, and other items such as insurance. But if you are
buying wholesale properties, fixing them and refinancing to pull cash out,
you should be able to pay all your expenses and have a nice profit at the
end of the day. (Just keep some of that cash in reserve for emergencies)
If you do 3 houses per year, and you only net $25,000 total, after paying
all expenses on each of the 3 houses, you are still netting $75,000 cash and
equity in about 6 to 8 months. Plus, if you are renting these properties,
you are also creating additional streams of income through monthly cash flow
as well as accumulating equity in each property.
This is a solid strategy to achieve a retirement nest egg and ongoing
income for life in less than 10 years. If you look around at the real estate
investors who are wealthy, the vast majority own rental property, be it
residential or commercial.
They understand the concept of buying at a discount, then holding their
properties for years. They get to the point where their holdings are worth
double or triple the price paid. This is free money that you can earn simply
by buying and holding long term.
There are wholesaling companies in every major city that specialize in
selling fixer upper properties that fit with strategy number 3 in this
Look for their signs on the side of the road, their ads in the paper, or
ads in local thrifty nickel type shopping papers. Most deals do require some
out of pocket cash, even if it is only temporary, until you refinance.
True no down payment opportunities are pretty rare these days, with
interest rates at historic lows. If interest rates go back up, (and they
will), we will see more creative financing and more "no down payment"
opportunities in the future.
If you are in the Atlanta, GA area, or wish to buy property in the
Atlanta area, you can contact me at email@example.com I have
properties, land, financing sources and property management services for
Donna Robinson is a real estate investor, consultant, and author. Her
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