It doesn't seem all that long ago prospective home owners could find a multitude of lenders willing to grant conventional mortages with zero money down. As it turns out, this merely added kerosene to the fire known as sub prime loans leading to a real estate and general economy melt down continuing to this day. Now the zero down convential loans are gone and lenders are requiring anywhere from 5-20% down on convential mortgages, depending on the type of property. There are still a few ways to possibly purchase real estate with limited cash however.
VA LOAN: You can qualify for a Veterans Administration (VA) loan with no money down if you or your spouse are a current or past Veteran of the Armed Services, Reserves, or National Guard. One disadvantage of this type of loan is that you must pay a funding fee, which currently is 2.15%. The fee is intended to enable the verteran with the VA loan to contribute toward the cost of the benefit, which reduces the cost to the taxpayer. The funding fee is very often added to the loan amount, so that the loan amount becomes greater than the sale price of the home. This creates a situation of negative equity for the buyer which will last until the principal is paid down below the present value of the home.
Veterans who are receiving VA compensation for service-related disabilities and surviving spouses of veterans who have died in service or from service related disabilities are exempt from paying the funding fee. The maximum VA loan is $729,750 - until the end of 2011. There are some other eligibility requirements that are related to the length of your military service.
VA loans are for owner occupants only and not intended for investment property purchases. However you can always live in the home for a few years, and then move out and turn it into a rental property. For more information about the specifics of a VA loan, email me at acs926@aol.com and I will get you hooked up with my qualified mortgage lender.
FHA LOAN: This loan is is insured against default by the Federal Housing Administration (FHA). FHA does not lend the money, they insure the loans. The purpose of the FHA is to promote home ownership for those who do not have a lot of money. Almost anybody can get a FHA loan, providing you have reasonable debt to income ratios and decent credit. A few years ago, the FICO score needed for FHA and VA was only 580. Recently, however, lenders have tightened standards and raised the minimum scores needed on both loans to 620.
One disadvantage of FHA loans is that they require Mortgage Insurance Premium (MIP), which is 1.5% of the loan amount, and is paid by the buyer at closing. The Obama adminstration has proposed that the $8,000 first time home buyer tax credit may be used as partial money towards the down payment but the buyer must put up some money as well and of course, these complicated rules are still being worked out.
Presently, the maximum FHA conforming loan limit is $417,000, but in higher cost areas this can be adjusted to 115% of local median prices, not to exceed $625,000. As with the VA loan, you can not use an FHA loan to buy investment property. However, you are allowed to buy a duplex, providing that you live in one side of the duplex, while renting the other side. And similar to the VA loan, you can also buy a home with an FHA loan, live in it for a few years, and then rent it out. However, you can not have two FHA loans at the same time, so your next home will have to purchased with conventional financing.
Keep in mind that with a small down payment comes a larger monthly payment of principal and interest. For example, on a $150,000 loan, with zero down, at 5% over 30 years, your principal and interest payment will be $805.23 a month. But put down 5% on that same $150,000, and your payment drops to $764.97 per month. The $40 savings per month may not seem like much, but over 30 years it adds up to over $7,000 in reduced interest payments.
HARD MONEY LOANS: I remember the crazy days of home flipping when these fixer upper loans were very popular with investors who had either mediocre credit, little cash, or both. Although each hard money company is different, most will loan money based upon the after repaired value (ARV) of the property. Hard money companies do their own appraisal to determine what that ARV will be, and then they loan the investor 65-70% of that amount.
So, for example, let's say an investor finds a handyman special that appears to be below market value, with an asking price of $70,000. The investor calls the hard money lender, who sends someone out to appraise the property within 24 hours. The lender determines the ARV to be $110,000. The investor makes an offer of $57,000, and after some negotiation, the investor and seller agree to a sales price of $62,000. The lender is willing to lend 65% of th ARV, or in this case, $71,500.
Sounds great, right? No out of pocket for the investor, and they even receive $9,500 more than the sales price. But not so fast my friend - hard money lenders generally charge very high closing costs and 4-5 "points" (each point is 1% of the loan amount) on a deal. So points alone on a $71,500 loan could be as much as $3,575. By the time all the closing costs and points are paid, the investor may have very little money left to make the necessary repairs to the home. Additionally, hard money lenders will often charge interest rates of 12-15%, and there is usually a "balloon Payment" (the total loan is then due in full) within two years. So one either needs to re-sell the property quickly, or to re-finance it later on. Renting the property makes no sense, as the high interest rate will more than likely create a negative cash flow for the investor.
I will not recommend hard money loans to my investor clients - the risks of not being able to re-sell right away with the monthly payments of double digit interest rates killing any chance of making a quick profit are much too great especially in the present economy.
HOME EQUITY LINE OF CREDIT (HELOC): If you have sufficient equity in your primary residence, or even in other investment properties, a home equity line of credit (HELOC) is another way to obtain cash for a second home or investment property. However, remember that a HELOC is in essence a second mortgage on your home thus not all that attractive for speculative investments.
At one time, you could borrow about 80% of your total equity on a HELOC. These days the banks are a bit more stingy, as their fears of declining home values have materialized. Also, with many home owners now having less equity, or even no equity in their homes anymore, the banks have begun to limit any further draws on already granted HELOC accounts in which the equity has collapsed.
The use of leverage when buying with limited cash is one of the greatest benefits of buying real estate, wheter it's for a primary residence or for investment property. However we must keep something in mind. While buying properties with limited money down will provide the greatest return on investment during times of appreciation, it will also hand you a large percentage loss when property values decline.
For example, if you put down $10,000 on a $285,000 home (3.5%), and the property appreciates to $300,000, your ROI is $15,000 divided by $10,000, or 150%! One could argue that you are paying interest during the time of appreciation, and that brings down the ROI, but what if the property were a rental and the tenant paid you mortgage during that time?
On the other hand, if the value of the home declined from $285,000 to $270,000, you now have a huge percentage loss, even if you have been renting the home during that time.
I hope this helps show the different ways to possibly acquire property with limited cash with a few pros and cons sprinkled in.
Please contact me and I promise to personally help you solve all your complicated questions in these complicated times - Alice C Smith