How to Buy a House With No Money down? (Investment Property)
You are out in the market to buy a rental investment property. This property is a great fit for your rental portfolio but sadly you don’t have enough money sitting with you right now. So, are you going to turn off your eyes for this deal or do you have a plan to buy this house with no money? We all stuck in a similar situation sometime in our life as we rarely save enough. But no need to worry, as buying a house with no money is still possible.
You can buy a house with no money down. There are various financing options available today that can help you make the purchase using little money to no money at all. No matter you have a low credit score, whether you have a verifiable income or not; you can buy an investment property.
How to Buy a House with No Money Down?
The Pro Investors always hunt for good deals even when they have no money to fund it. They never bother themselves for dollars but for deals. If they are getting a deal for pennies on the dollar, they will anyway raise the money even if the deal is worth millions of dollars. Likewise, if you have a good deal under your hand and wish to purchase a home with no money. Wait for no further and raise the money with these verified ways of financing.
1. Conventional Loan (To Buy A Rental Property)
To start with, you can purchase your investment property using the Conventional Loan. It is a type of loan you get through the banks and the mortgage firms. These are the private institutions that help you fund your purchase.
This type of financing is ideal for those investors who have funds to pay the initial down payment. Generally, these institutions allow a loan of 70-80% of the property value. The main benefit of this loan is its flexibility to include an array of properties, be it investment homes, second home, owner-occupied homes, and commercial properties.
The approval for this type of loan depends upon your credit history and credit score. These financial institutions evaluate your current assets, liabilities and your income to see your eligibility for a loan. It is kind of a personal loan and is not available for LLC`s. You can avail financing for a long term of up to 30 years at a low rate of interest. This loan will be beneficial for you if you are holding only a few rentals for the long term.
|Conventional Loan Requirement|
|Minimum Credit Score||620 and Above|
|Loan Flexibility||Yes (Covers Multiple types Of Property)|
|Private Mortgage Insurance||Required (Below 20%)|
2. VA Loans (to Buy a House with No Money Down)
Are you are a member of the US Military or a spouse of someone in the US Military? If yes, you can purchase your home without money by availing the VA Loan. It is no money down financing option available exclusively for Veterans. If you are someone who is active on duty or have been discharged honorably from the service, you can purchase your home using the VA Loan.
With the VA Loans, you can avail 100% financing on Loan to the value of your property. This loan is limited to primary occupancy only. However, you have an option to buy a multifamily home with the VA Loans and rent out the additional units. But the condition will still remain the same that you have to occupy at least one unit as your primary residence.
The VA loan is guaranteed by the US Department of Veteran Affairs which makes it easy for an individual to secure a loan. The VA doesn’t provide or originate loans themselves. Instead, they serve as a guarantor, and the loan is issued by qualified lenders only.
|VA Loan Requirements|
|Minimum Credit Score||No Such Requirement|
|Loan Flexibility||No (Only Owner Occupied)|
|Private Mortgage Insurance||Not Required|
3. Home Equity Loan (to Invest in Real Estate with Bad Credit)
Ever wondered, the home you are currently staying in has got equity tied to it. And, you can use this equity to fund your next rental house purchase. You can tap into your home equity by either refinancing the current mortgage on your primary home or take a Home Equity Line of Credit (HELOC). The Equity Loan is sure one of the best ways to buy the rental property and start your rental business today.
Home Equity loan works best for those rental investors who have secured good equity under their hand. If you have a house currently which is free and clear, the home equity loan is your solution. The Home Equity Loan has lower interest rates and you can avail up to 80% Loan to value ratio. You get lump-sum amounts that you can easily repay in the next 10-15 years.
You can even use this type of loan for down payments on your second purchase when you already have a loan running on your first property. Suppose you have a home that values at $200,000 and you have $120,000 remaining in the mortgage. This means you have an equity $80,000 which can be used for purchasing a second investment property.
This type of loan is easier to secure even if you have a history of bad credit because it is backed by your property as collateral. You just need to prove your ability to repay the loan. Though it can also work against you and you can lose your property if you fail to repay the loan.
|Home Equity Loan Requirements|
|Minimum Credit Score||620 and Above|
4. Seller Financing
If you are having trouble securing the loan the traditional way, you can always ask for seller financing. The seller financing is a type of loan where the seller gives you a loan to fund the purchase. In return, the seller can get monthly mortgage payments with a handsome interest rate.
However, this type of financing, in general, is not that common but you can always ask. Your chances become more if you can find a motivated seller. This type of financing option is popular in the area where it is very hard to get loans. In this scenario, the seller may have a hard time selling the property. So, they generally allow this type of financing.
With this type of arrangement, the seller doesn’t lend you money instead he reduces the down payment and extends your credits. This type of financing is for shorter duration say up to 5 years. This financing is suitable for those buyers who immediately are not able to get conventional financing but can refinance the property after some time of getting seller financing.
5. Seller Second Mortgage (to Buy Property No Money Down)
Having no money to buy a house, you can go for a seller second mortgage. It is a way of getting second financing by the seller of property. The first 80% can be financed through a conventional loan and the remaining 20% can be financed by the seller.
It means that you will have two mortgages on your property. One is conventional financing and second is seller financing. The first mortgage lenders sometimes don’t allow this type of carryback financing but you can always ask for one.
Also, in order to opt for a second seller mortgage; you have to take the consent of your first mortgage lender. Remember, this type of financing is risky and you should always plan your repayment options properly.
If you are to use this financing for the rental purchase, better you figure out the NOI and the cash flow from the property first. You must be able to pay the mortgage payments after calculating the NOI and cash flow.
6. Private Money Lenders
You can always fund your rental purchase with the help of a private money lender. These money lenders are generally the people you know or are in your circles. They can be friends, family members, colleagues, or even a co-worker. These types of investors can fund your deal from their money.
There is a good chance of getting this investment very fast and smoothly as these lenders have spare money to invest and don’t want to take much risk with their hard-earned money.
You can always ask for a lower rate of interest as compared to the market. These people know you personally and the money that they have has been sitting ideally doing nothing for them before this. Also, you can even ask for a little more reduced rate of interest by sharing with these lenders a percentage of your profit.
During this financing, these lenders keep the house or the property as the collateral. It gives them a sense of confidence in the deal and strengthens your association with them. You are opening up a financing runway for all your future deals.
|Private Money Loan Requirements|
|Minimum Credit Score||No Such Requirement|
7. Hard Money Lenders
You are a type of investor who is looking for flipping houses or long term rental purchase, hard money loans suits you the best. These are small duration loans say for about 3 months to max 3 years. With these loans, you are required to just pay the interest and the actual principal dues only at the end of the term.
Hard Money Lenders can be an individual or a company that gives you finance to fund your rental house purchase. These are organized individuals or companies that specifically deal with real estate financing. They require a long list of documents, formalities, and guarantees to fund your purchase. However, if you get qualified, you can get the money real quick to purchase the deal.
This type of loan is suitable for you if you have the capability of paying it in the fixed duration or has other financing options available for paying it in the future. You can use it as a bridge loan to fund an immediate deal and then repay it later with another medium.
The hard money lenders generally provide 60%-70% Loan to value and keep your property as collateral. The risk involved is always high with this type of loan and if something goes wrong, you can lose your property. Hard Money Lenders always prefer to lend someone who has prior experience with real estate.
|Hard Money Loan Requirements|
|Minimum Credit Score||550 and Above|
You might not have enough money to even put the down payment but you can always find a partner to finance the complete deal. This partner can be a family member, or a friend or colleague. The person who always wanted to invest in real estate but haven’t yet done that due to lack of experience or some kind of fear.
The partner will put all the money and you do all the leg work. Such Partnerships work great when you are out in the market to buy and flip the property or looking to hold a rental property for the long term.
This type of arrangement also works wonder for you if you own a large portfolio of properties already and has your credit limit exhausted. With a partner, you do not need to put your name into the mortgage and can expand your rental portfolio easily.
Mind this when going for this type of financing arrangement, pick up a right partner who is like-minded and can gel well. Things will be easier for you if you partner with someone who has little prior experience in investing in real estate.
9. FHA Owner Occupancy Loan (for Low Money Down Investing)
You are new to investing and looking to purchase your first investment property. FHA Loan can be a great fit for you. This loan has been started by the Federal Housing Administration to encourage ownership. You can buy a house with FHA Loans by putting only 3.5% down and can get 97.5% loan to value funding easily
These loans are however available only for properties occupied by the owner primarily. But you can purchase a multifamily house if you are looking for an investment property and rent out other units. The limit to multifamily homes is at 4 units max.
For the first time investors who always dreamed of starting the rental business, FHA Loan is an ideal way for landlord financing. The interest rates are low and you can easily repay the loan in the span of 30 years. Also, If you don’t want to occupy the property, you are free to move out after one year of occupancy and can convert it into a full-fledged rental.
|FHA Loan Requirements|
|Minimum Credit Score||580 and Above|
|Loan Flexibility||No (Only Owner Occupied Homes)|
10. USDA Home Mortgage (to Buy a Home with no money down)
According to a survey, 20% of Americans are already living in rural areas and 27% of other Americans, as they say, would prefer to live in these areas. With such good numbers, most rural parts of the United States has now received attention from investors. So, it is a really good opportunity for an investor to invest in these areas.
With the USDA home mortgage, you can easily finance an investment property at a 100% Loan to value ratio. This means you can start with investment properties at a zero money down. Having 100% money down and USDA efforts of developing these areas, more and more people have started shifted to these areas.
This mortgage, however, is available for owner-occupied properties only. But, you are free to convert it into a rental house or investment property after 3 years of occupancy. So if you are looking for an investment opportunity, a property under the confirmed areas of USDA is a worthwhile deal.
|USDA Loan Requirements|
|Minimum Credit Score||640 and Above|
|Loan Flexibility||Owner Occupied Homes (in USDA Approved Areas only)|
You are looking to make money with the rental properties but have very little money in hand. For such budding entrepreneurs, a rent to own arrangement works pretty well. The rent to own arrangement is generally termed as a Lease. Having little money in hand or by financing little money, you can lease a rental property.
A lease refers to buying a contract from the owner at a set price for later purchasing the property. For this, you need to pay an upfront contract price and the monthly rent to the owner. This arrangement allows you to pay the complete cost in 4-5 years for which you should have a proper exit strategy.
After paying some amount to exercise your contract, you can have tenants to live on this property. You will collect monthly rents from them. And, some portion of this rent is allocated towards the purchase price
It will be great if you collect a little more rent than what you are actually paying to the owner. However, you are required to tell your complete plan to the owner before exercising this option. Furthermore, this arrangement allows you to have a complete insight into the property before you actually buy it.
Later, if you don’t want to own the property or feel it unprofitable, you can leave it. The only part that will be lost is the rent you have paid and the contract price at which you have purchased. You can even sell your contract to some other investors at a profit. But, if you can exercise your option well, you will stay in a complete win-win situation.
Understanding the closing costs associated with these Loans
When you buy a house with financing, there are various closing costs associated with these loans. A buyer who is buying a house by putting less than 20% down typically spends about 2%-5% of the loan amount on the closing costs. An investor who puts 20% or more has comparatively reduced upfront costs.
It is important to consider these upfront closing costs along with the property cost when obtaining the financing. It makes no sense if you get the shock of closing costs after receiving the financing. When you are about to settle a loan, you get a closing disclosure form which contains the break up of all the closing costs and fees associated with the loan. In general, the closing costs include
Mortgage-Related Closing Costs
- Loan Application Fees
- Loan Origination Fees
- Assumption Fees
- Prepaid Interest
- Attorney Fees
- Mortgage Insurance Premium
- Private Mortgage Insurance
Property Related Closing Costs
- Title Search
- Home Appraisal Value
- Escrow Service Fees
- Home Inspection Fees
- Land Survey Fees
- Home Owner`s Insurance
- Home Warranty
- Property Taxes
- Stamp Taxes
- Home Owner`s Association Fees
Also, remember to include the fees of the Mortgage Broker if you have obtained financing through a mortgage broker. They usually charge about 1% of the Loan Value as their commission. A thing to understand here is that the closing costs are negotiable. These are not fixed costs and you can always try your negotiation skills to get a better deal.
And, somehow if you feel trouble paying the closing costs, you can purchase mortgage rebate points. These mortgage rebate points help you lower the closing costs in exchange for a higher interest rate. It also works the other way. You can also purchase the prepaid discount points earlier by paying some money upfront to reduce your rate of interest.
Can you buy a property with no money when you don’t have a verifiable source of income?
It is easier for someone to secure a loan when you have a job. Lenders can easily verify your income through W2 Forms and Pay Stubs. But if you are self-employed or receive a commission-based income, mortgage companies have a hard time verifying your credibility of repaying back to them.
Buying a property with no money is still possible even if you don’t have a verifiable income source. You definitely can secure a loan. There is no income verification loan available for such borrowers. No Income Verification Loans include
- Stated Income Stated Asset Loan
- Stated Income Verified Assets Loan
- No Income Verified Assets Loan
- No Income No Asset Loan
Consider these loans only when you actually have the capability to repay the loan. Lenders might not require the proof of your income but they still verify your financial standing.
The Bottom Line
There you have it all the best available financing options when you are out in the market to buy an investment property with little money or no money at all. Definitely there are factors you need to consider which type of mortgage suits your need the best. Compare all the eggs to get a good bargain as there is no dearth of availability of lenders.