Many emerging and veteran real estate investors are looking for ways of financing real estate investments with little or no money down. The traditional cash down payment of 20% just doesn’t work for most buyers anymore, and sometimes (especially with banks shutting down the sub-prime loan market) a more creative method must be deduced to facilitate the transfer of real property. Further, even if real estate investors have the necessary cash, it is more beneficial for them to finance most of the balance than to fork over the cash, because it will allow them to buy into other properties with the left over monies. But let’s visit a few of the financing strategies used in some of today’s real estate investments:
- Seller Carry Back
This method incorporates a mortgage, typically 80% of the home’s value, and the seller takes back a second lien for anywhere from 5-20% of the balance, thus enabling the real estate investor to escape the death grip of PMI (private mortgage insurance) with the added bonus of not having to come up with a lot of money down.
- Lease Option Agreement
A lease option agreement allows a buyer to come up with a cash down payment, with a fixed term lease, and the option to buy at the end of the lease. The down payment would then be credited to the buyer at closing. If the buyer passes on the option to buy at the end of the lease agreement, they would forfeit the down payment.
- Lease Purchase Agreement
A lease purchase agreement is a more traditional “rent to own” concept. In this scenario, the lessee is allowed to credit a portion of the rent toward the down payment on the house. The lease has a fixed term, and at the end of the lease, the buyer has the option to buy at the agreed price. If the buyer passes, ownership and all rent is retained by the owner.
- Loan Assumption
This typically only works for FHA and VA loans. In today’s world, FHA and VA loan assumptions must be approved by the respective agencies. Loans that were issued before the cutoff date are still assumable without FHA or VA approval. This is a great way to get into a property with little or no money down.
- Low Down Payment Mortgages
With good to excellent credit, many mortgage lenders will still offer a loan for little or no money down, especially if you intend to live in the premises for awhile. If you go FHA or VA, this is a chance you can get into the property for 0-3% down. Most conventional mortgages will still require at least 5% down, but do some homework, you might find a no money down deal out there.
- Home Equity Loan from Another House
I was in this situation recently. There was a mobile home on a small piece of land that I was wanting to buy, and no lender was prepared to lend money on it unless I intended to occupy the property as my primary residence. I had enough equity in my current house to cover my bid amount, but alas, the seller did not agree to my price. Don’t let it discourage you though! Sometimes, it takes many offers before you land on a seller that will agree to your price (or close to it, anyways). Keep plugging!
There are other options out there for financing real estate investments. If you have any questions, feel free to leave them in the comments area below. Sign up for my RSS feed to get instant updates.