Buying a Home With “No Money Down”

Almost every day we see advertisements that bombard us with the idea that we can buy a home with no money down.  The “get rich with real estate” infomercials love to market this concept and they make it seem like it is the easiest thing in the world.  This marketing tactic appeals to our desire to get something for nothing.  But do you ever wonder why they are making money selling this idea instead of actually investing in real estate themselves?  It might be possible to get some sort of financing that allows a person to purchase a home for no money down, but it just means the buyer is going to pay more each month in interest.  Depending on your particular situation and goals, this might be a great way to buy a house–or a really bad one!

With the new rules in mortgage financing, the possibility of paying with no money down has decreased.  In order to get a home for no money down, a borrower needs to get a loan that not only covers the price of the house, but all of the closing costs, including loan fees, escrow fees, appraisals, title insurance, and other expenses.  Mortgage lenders used to call these loans “One Tens” or “One Twenties” which enabled a borrower to get 110% or 120% of the home’s sales price.

These loans worked best for a primary residence, not for an investment property.  Borrowing more than something is worth isn’t always the best idea.  Owing more on a home than it is worth is considered being “upside-down” with the loan, or “underwater”.  During the latest economic crisis, many home owners found themselves in this position when home values fell.  Selling a home that is “underwater” is difficult to do since the seller still owes more than the fair value of the home and may need to come to closing with additional cash to pay off the loan.

Real estate investors may use a no-money-down tactic to buy a home if they want to keep the home as a rental property.  However, buying investment property with no down payment is not the wisest move.  Your interest rate, for one, will be higher, and can zap all or most of your profits.  Your best hope would be that the property would 1) appreciate enough over the years to sell at a very large profit, or 2) end up being a tax write-off if nothing else.

Here are some things to think about if you want to buy a home with “No-Money Down”:

  • Check to see if lenders have any “zero-down” programs.  There are special programs available for first-time home buyers.  The FHA, HUD or the VA might have programs that would help pay for almost all of the costs of buying a home.
  • If a lender can’t help finance the whole cost of buying a home, consider borrowing the difference from friends or family.
  • Create a business venture where an investment partner receives interest or part of the profits when the home is sold.
  • Trade something.  Does the seller want something you already own?  Offer that item as a trade in place of the down payment or closing costs.
  • Offer the seller more money for the home instead of making a down payment.  This “owner financing” gives the seller more money in exchange for taking on more risk for loaning without the down payment.
  • Use property or investments you already own and borrow against those assets.  Use the proceeds for your down payment and closing costs on the new property.
  • Use a home equity loan.  Many lenders have programs where they will lend money on the equity of your home.
  • Some life insurance policies will allow you to borrow against them to make investments.
  • Have the seller refinance the property for its full amount and then give the seller a note for the equity in the home.
  • Rent-to-own or lease with an option to buy (Lease-Option).  Some sellers will allow you to do this if you ask.  Part of the monthly lease payment could be set aside for a future down payment to buy the home or to pay down the principal on the option price offered. This is often attractive to sellers when you offer to pay more than the current rental market price.