There are heard many questions over the years from students about if or not it is really possible to buy real estate with no money down. Essentially the most frequent questions I get are from mortgage brokers in addition to realtors. Since mortgage brokers are by definition trained to investment a loan based on bank requirements like 20% down payments, then by definition anything else seems to be beyond the scope in their possibilities. It has been my experience that many horseshoe bay resort real estate professionals don’t appear to understand the concept of “no money down deals”.
Firstly, the definition of no money down does not mean “no money down”. It simply means none of YOUR money down. It could be Uncle Bob’s money, the sellers’ money, or a loan from Auntie Sally. It could also be a credit line, a private investor, tricky money lender or anyone else for that matter. It is very important to understand this idea. Now, if you were to purchase a house and put down 20% which you borrowed from your relative, then you would have purchased the house with no money down. You can call it 100% auto financing or whatever you want to call it. As far as the bank is anxious you put down 20%. However there is a problem with that due to the fact as many mortgage brokers will tell you, banks want to know the source of the finances. When they see that the funds are borrowed and that you do not “skin” (your money) in the deal then they will turn down the loan.
So , what is an investor with no cash going to do to get around this problem? The solution is to borrow ALL of the income to purchase the house for cash. If you borrow from Uncle Bob all of the cash then you can be a cash buyer. Cash consumers are very rare today and if you are a cash client then you can buy bank owned REO properties at a substantial discount to market value. But Uncle BOB is not going to really feel loaning you money to buy a house unless there is considerable security for him. Since banks loan money at college loan to value (LTV) ratios of 70% Uncle Frank might be especially cautious and only agree to loan money on 60% LTV. Is this risky for him? Well it can be less risky than conventional mortgages that are funded by means of banks. Why is it less risky? Well firstly, conventional finance institutions loan based on a mortgage application, a credit score and the appraisal. But Uncle Bob is a little smarter than the normal bank. He actually can go out to the property and scrutinize it himself. After all, if you don’t pay him then he is going to get the property since he has the first mortgage. So Grand uncle Bob is going to need to have enough knowledge of real estate to feel relaxed that if you don’t pay him, and he gets your house that they will have a deal.
Uncle Bob is going to do his own comps and is particularly not going to rely on an appraiser. Uncle Bob will spend days or even weeks investigating the property compared to the a half hour that an out of state loan officer looks at a file. In the event Uncle Bob is convinced that your deal is a good cope, then he is going to loan the money. If you are paying him 10% interest and the bank is only paying him 2% after that Uncle Bob will make more money loaning on real estate when compared to having his money in the bank. If Uncle Bob has done his / her homework then he will only fund a deal at 60% LTV or less. What this means, is that if he thinks the home is worth $100, 000 he will only loan you $60, 000 and no more.