“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
Buying investment property with no money down is possible, though it s by no means common. Nor is it easy.
Probably the most common type of “no-money-down” purchase is when investors use credit lines (their own or from a group of lenders acking them) to cover the entire purchase price of a property. This is what buyers at foreclosure auctions often do. They use the credit lines to come up with the cash to buy the property. Then, once they own it, they refinance or try to fix-and-flip it for a quick profit.
There is also something called a purchase money mortgage (PMM), where the seller lends you money. In this case, the bank might lend you 80% and the seller 20%. Aside from closing costs, that would make it a no-money-down deal. Most traditional banks, however, won’t permit you to use borrowed money for the down payment. Those that do will insist that their loan be the superior lien. And many of the sellers who offer this kind of deal charge more for the property than they would if they didn’t do a PMM.
If you’re buying property for your own home, there are government-backed programs that allow up to 100% “loan to value” (LTV). The Department f Housing and Urban Development (HUD), for instance, has the FHA loan program. These are loans made by qualified private lenders but insured by the government. With an FHA loan, you can get as much as 100% financing n the purchase of owner-occupied property. The Veterans Administration VA) offers a similar program to qualified veterans and to the widows and widowers of veterans.
For conventional loans (non-government-backed loans), there are also 100% LTV programs. But, again, these are not for investment properties. They only apply to loans for owner-occupied properties. (Ask the lenders in your area about Fannie Mae Flexible 97 and Flexible 100 loans.)
In all the above cases, you can use these special loans to buy residential properties of up to four units. Therefore, depending on the price you pay for a multi-unit property and the rental income it generates, you could conceivably use these programs to buy a property with no money down and live rent-free or close to rent-free yourself.
Buying with low money down — as an investor or owner-occupier — is more common and not as difficult. I’ll cover your options on that score in another message.
(Ed. Note: Justin Ford is the editor of Main Street Millionaire, ETR’s real-estate investment success program.)