No Money Down Loans: How Do They REALLY Work?
Is it possible to invest in real estate without putting in your own cash? And even if it’s possible… is it a good idea?
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There has been some buzz in the industry recently about zero down payment loan programs for investors. But what's behind the buzz? Is this purely a marketing gimmick, or are there legit zero down payment options out there?
To answer that question, I've taken a closer look at a couple of the zero down payment loan programs to see what is really being offered, what the requirements are, and what some possible pitfalls may be.
Lenders With No or Low Down Payment Loan Programs
A zero down payment loan might sound enticing at first glance, but let's not forget that lenders are first and foremost in business to make money. If they don't require a down payment, you can bet they will have other requirements that serve to both lower their risk and boost their profit.
First, let's see what is really being offered by pulling back the covers on two loan programs that advertise they require no down payment.
Example 1: “Finance up to 100%”
In April 2019, Hard Money Sources announced a new lending program that allows qualified borrowers to finance up to 100 percent of their real estate investment projects.
The zero down payment loan, according the company’s website, is really a combination of two loans:
- A personal loan based on the borrower's individual creditworthiness. This would be used to cover the down payment requirement. This would likely come with a higher interest rate, like what you would see on credit cards, since this loan is riskier and not backed by any collateral.
- A traditional hard money loan that is backed by equity of the property being financed.
A minimum FICO score of 680 and income verification are required.
Example 2: “No money down”
Alternatively, DoHardMoney advertises their program as a no money down loan program. They will fund up to 70 percent of the after repair value (ARV) of a property.
That 70 percent can cover the property purchase, rehab, and loan costs. A potential glitch with this program is that when the appraisal is done, they may not be able to lend 100 percent and still meet the 70 percent to ARV requirement. If this happens, the borrower must come up with the difference.
Unfortunately, this gap isn't revealed until very late in the process, usually after the borrower has already invested a lot of time and effort into the application process. If the borrower sticks with the lender, they end up with a loan that is less than 100 percent.
What You Need to Know About Zero Down Loans
Neither one of these companies disclose the interest rate they will charge for these “no money down” loans, so it is important to get that information up front. When a lender asks for no money down, they are taking on more risk, so you should expect higher rates to offset their risk.
In addition to no money down loan programs. there are other options for borrowers with limited cash.
- Find a lender that sells a portion of their loans. Buyers may accept an LTV between 85% to 100%.
- Some lenders will forego the down payment but require additional collateral. For example, another property the borrower owns will be used as collateral on the zero down loan. Under this option, the borrower can get 100% loan to cost.
- Get close to 100% with a loan program that offers 85% of purchase price and 100% of rehab costs. Blended, this ends up being 90%+ LTV, depending on the size of your rehab budget.
- Call on friends and family who may be willing to offer a loan with little to nothing down.
- Find third-party lenders who will provide just enough money for a down payment. This money could either be in the form of a loan or as equity, where the third party receives a portion of the profits.
- Consider house hacking. Investors purchase a multifamily property and live in one of the units, thereby qualifying for owner-occupied loan programs.
- Invest in a real estate development project or portfolio of projects with as little as $500.
It is possible to invest in real estate without putting in your own cash, but the devil is in the details. Do your research to find out if the zero down offer is truly what it claims to be and check the interest rates on what is being offered.
If you do find a no down payment loan program, determine if it is a good option for you. The answer probably depends on why you need a zero down payment loan.
If you’ve been a successful house flipper, the market is healthy, and you need the cash due to a timing issue (for example, you are waiting for a property to sell), then these loan programs could be a good option. On the other hand, if you are new to investing, have limited funds, and have little in reserve, a zero down loan may introduce too much risk and may not be the best option.
Thinking of using a zero down loan? What offers have you come across? Or have you used a zero down loan in the past? How did it go?