Mortgages & Creative Financing

No Money Down Loans: How Do They REALLY Work?

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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.

house cutout and coins stacks increasing in height in a row on table

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:

  1. 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.
  2. 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.

Related: The 3 Things That Make No Money Down Real Estate Dangerous

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.

Related: Where Do You Get the Money for Your First Down Payment?

Conclusion

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?

Comment below!

Ian Colville is the Managing Partner of CCM Finance. Ian is a native of Minnesota (born in Rochester). He brings both a formal education (BA in Economics and MBA) as well as industry experience to ...
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    Mohammad (Asad) Asaduddin Wholesaler from Houston, TX
    Replied about 1 year ago
    Great information Ian. Do you or anyone know of a lender who will not require insurance and flood insurance? Lowr LTV is acceptable. But I hate the high insurance premiums.
    Chand King from Arizona
    Replied about 1 year ago
    I'm glad you wrote this Ian. In my head I came up with this great no money down idea using 2 loans to get one house... Talk about over leveraging myself especially as a new investor. Appreciate it!
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied about 1 year ago
    @Mohammad (Asad) Asaduddin: I have never heard of a lender, public or private, that did not require insurance (property, flood and even earthquake). After all, the lender needs to protect the collateral. When I hold a note, I require proof of insurance and annual verification that all taxes have been paid.
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied about 1 year ago
    In reading this article, I am having visions of all of the Zero down, 110% LTV or 1st Mtg + 2nd Mtg "package" types of loans that I saw before the 2008 crisis. All I can say is that just because it can be done [100% leverage], does not mean it should be done. I am old school in that I believe you should not only have some skin in the game (at least 20% your own money), but that you have earned the right to even play the game. If you do not have the proper capital to play; either save until you do, find a partner or by a REIT. I know that may seem quite harsh, but for those that did not live and invest during the last housing crash, please take it as advise from someone who did. Personally, I was not harmed by the crash because I always had skin in the game, a solid reserve and patience. All of the "investors" that used the 90%, 95%, 100%, 110% (yes, it existed) LTV type loans got creamed, lost their properties and quit the game. The true investors that were not over leveraged had a true field day because we were picking up quality properties for 20 cents on the dollar. Again, for the new investors out there, be VERY careful using a high level of leverage. While it can be a great thing, it can also turn on you very quickly.
    Dave Rav from Summerville, SC
    Replied about 1 year ago
    So, Joseph M you're consistently putting down 20% of your own money on properties in Sacramento? That sounds very difficult. Please don't get me wrong, like you, I am against the 110% LTV (why would anyone EVER loan over the value of anything?!?! - that's just bad). However, 20% can be a lot of money, on say a $300-400k property. I've been an REI since 2008 and Ive only put 20% down ONCE. While caution should be heeded if you get 100% financing, I think middle ground is also ok. Say a 10% down loan. Also, banks (and anyone else) shouldn't assume if I dont put money down that I "dont care, can't be trusted, and will just walk away" from the deal. I've consistently done deals using little or none of my own money and I've NEVER walked away from the dozens of deals I've completed.
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied about 1 year ago
    @ Dave: I stopped investing in CA in late 2005. Other than my personal residence and raw land (for development purposes), I do not / will not own any residential rental properties in CA. Not worth the headache. Plus I can make a higher ROI with a lot less risk and gov't red tape elsewhere. When I did invest in the Sacramento area, yes, I did put down at least 20% down, one property I put down almost 30%. While I like leverage, I never used it in such a way that it could come to bite me. Others that I know did and it did not turn out very well for them. If you and others are comfortable with a high LTV loan, then go for it. Just be aware that it can turn on you in the event of a downturn. Each person's business plan is different.
    Charles Borrelli Investor from Palm Bay, Florida
    Replied about 1 year ago
    I think that before 2008 the EZ loans brought out a lot of amateur investors that considered themselves professionals due to a rapidly rising market. It also created lazy or unskilled investors that were buying bad deals and even brand new homes at market price and gambling on further price inflation. We do a good bit of flipping and keep a few of them as rentals. When we do a rehab on a distressed property and then refinance (BRRR) We are normally looking at 40-70% LTV so we have a 30-50% interest in every property we hold. Our Market here in space coast FL seems to have leveled out over the past 2 years. We are seeing abut 2.5% appreciation and lots of good job growth in the area. We still have a housing shortage though. I suppose the bottom line on high rental costs is we stopped building for a decade but people kept having babies.
    Rob Barney
    Replied about 1 year ago
    I have been a direct hard money lender for the last 18 years (since 2001). I would like to clarify a point made in the column. 1. Our firm, DHLC has been offering 100% financing ( zero down ) hard money loans to borrowers since 2001. This isn't anything new. We offer this program to must borrower regardless of credit scores provided the property meets our criteria and the borrower has the financial strength to carry the loan. 2. While it's true that there may be a "gap" between what we can find towards the purchase price and the actual sales price this shouldn't be a surprise to the buyers if they have done their analysis correctly on the front end. If buyers work with a realtor or use solid comp tools, they should know what the ARV is when they put the property under contract. The same goes for the cost of repairs. (DHLC offers tools to applicants to help them determined the ARV and Cost of Repairs). Many direct hard Mindy lenders have programs that provide "no money down options". We have been doing this long before Wall Street got into this business with their 20% Low interest rate programs.
    Dave Rav from Summerville, SC
    Replied about 1 year ago
    I would surmise, as example 1 suggests, most NMD loans have a personal guarantee. They will come after your personal assets if default. Ive also seen some ask for collateral, be it inv property or your primary res.
    Brian NA
    Replied about 1 year ago
    Rob, are you lending in CA ? Looking for funding on a 1mm deal. Brian
    Matthew J Meyer
    Replied about 1 year ago
    Doesn't seem to address gov. guaranteed loans...
    Marco Hagens
    Replied about 1 year ago
    I would also suggest it could be possible to buy a home with no money down through owner financing. If the owner holds the title mortgage free then through some persuasion you could purchase the house from them without a down payment. They might go for this if you offer them their asking price and the house has sat on the market for a while. You could pay a servicing company to service the loan and deal with interest and tax calcs. If you were to default they would just keep all of your prior payments and repossess a property they are familiar with, it could work if you established a certain rapport with the seller.
    Mike Justice Rental Property Investor from Location Kentucky and USA
    Replied about 1 year ago
    Can investor get a cash out in 6 months on a owner financing deal ? If there is equity ?
    Jonathan Dick Hard Money from West Jordan, Utah
    Replied about 1 year ago
    If you are the owner of the property and there is enough equity... DoHardMoney can do a cash-out-refinance... just fill out a loan application on the site and you will get real-time results if you qualify.
    Jonathan Dick Hard Money from West Jordan, Utah
    Replied about 1 year ago
    @M. Ian Colville - Thanks for the mention of DoHardMoney as a source of no-down or zero-cash-to-close fix-n-flip loans. :) SUPER good tip on getting personal loans or business lines of credit to get 100% financing zero-cash-to-close loans. Another strategy we recommend if you don't have cash for a down payment is wholesale flipping your first few deals (which is ALWAYS zero-cash-to-close) until you've got enough cash for a down payment on a fix-n-flip loan. You are absolutely right that DoHardMoney will loan up to 70% of the ARV which can cover the property purchase, rehab, and loan costs (including interest payments, and closing costs) In case you didn't know, just like Hard Money Sources, we will ALSO allow personal loans (or ANY other funding source without any aging requirements) to fill any gap between what is needed for the deal and the 70% ARV that we can offer. You're also correct that sometimes our borrowers find out they need to bring some cash to close after investing some time in the loan process. This happens when the ARV the borrower estimated is higher than our our multiple independent evaluations... OR... when the borrowers estimated rehab costs are higher than expected after our experienced construction project managers review the provided contractors bid... OR... if after pulling credit and background there are things the borrower didn't disclose or wasn't aware of. We make every effort possible to estimate and disclose ALL loan costs at the very beginning and even provide a FREE real-time estimate of cash-to-close and net profit as soon as the loan application is submitted. Unfortunately... this is real estate... things don't always go as planned and there are different opinions on the after-repair-value of a property and what repairs are necessary to get that value on resale. This could always happen with EVERY HARD MONEY LOAN after getting the results of an appraisal and realizing your potential lender doesn't agree with you on the value of the property... and it's hard for everyone. Perhaps where DoHardMoney is most different is that we thoroughly vet rehab scope and bids because lending 100% of the purchase, rehab, points, and interest exposes us to more risk. Most lenders don't care or calculate if you will be profitable. (and some even make more money on a defaulted loan than a successfully paid off loan)... but with DoHardMoney... if we don't calculate that you will be profitable... we will not lend you the money... and we share all those calculations/estimations with borrowers upfront... sometimes it just takes a bit for all the numbers get solidified