478: Best of Fun Facts Friday – How to Acquire Investment Properties with Little or No Money Down

December 26, 2020bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 478: BEST OF FUN FACTS FRIDAY – HOW TO ACQUIRE INVESTMENT PROPERTIES WITH LITTLE OR NO MONEY DOWN

Can or should you try to put as small a down payment as possible on an investment property? Can you still acquire investment properties for little or no money down? In this podcast, Bill explores these questions and more as he shares information on where you can obtain loans requiring little or no down payment.

Before I show you how to acquire investment properties for no or low money down, let’s first look at what we mean and what it means to you as an investor.

If you are wondering how much you should put as a down payment when buying an investment property, do not worry, you are not alone. This is one of the most frequently asked questions that mortgage professionals face. The minimum down payment for investment property might sound intimidating, mainly if you are new to real estate investing. This is due to the fact that as a new real estate investor, you simply do not have the financial assets to be able to invest in properties without taking a mortgage. Moreover, there are all the papers you need to fill in as well as the documentation you need to take into consideration when it comes to the down payment.

Usually, you hear that the minimum down payment for investment property should be at least 20% of the total purchase price of your real estate investment. However, there are many factors that might have an effect on the down payment.

It is widely popular that banks and traditional lenders prefer a down payment of at least 20%. Moreover, they refer to 20% as the minimum down payment for investment property. The reason behind this is the security they get when giving the loan. This results in better loan terms for the real estate investor as well.

Is It Better to Have a Bigger Down Payment?

There are several reasons why a bigger down payment is better than putting a smaller amount of money. Mainly, it is about saving your financial assets in the long run. Here are the three main reasons why it is worth it to put a bigger down payment when financing real estate investments:

Lower Monthly Payments – It is always risky when investing in real estate. “Why is this so?”, you may ask. Well, you as a real estate investor take the risk of losing money on the property you are financing. Additionally, you take the risk of not being capable of paying back your loans. The final result could be ending up with a huge debt. However, if your plan is to be a successful real estate investor, you should learn how to do business by constantly being involved in real estate. For instance, with a down payment lower than 15%, you are putting yourself at risk of paying higher monthly mortgage payments than if your down payment is 20%, which is also known as the minimum down payment for investment property. This might not seem as a big deal at the beginning. However, it might turn out as an obstacle in the long run.
Lower Interest Rates – When you as a real estate investor decide to put a higher percent of down payment, in any case it means having less interest. For instance, if your minimum down payment for investment property is 20% from the total price of $350,000, then your interest will be $93,000 during the term of your mortgage. Nonetheless, if your minimum down payment for investment property is 10%, the interest will be $108,000. With 20% down payment, you would be able to save $15,000, a sum which might make a big difference in the real estate investing business of every new real estate investor.
Avoiding Private Mortgage Insurance – As previously described, banks prefer that real estate investors put at least 20% as a down payment. According to financing institutions, 20% is the absolute minimum down payment for investment property. However, when the down payment is lower than 20%, you will most certainly be charged additionally with private mortgage insurance tax. It is important to note this. If you decide to save some cash from the down payment, you might face some additional higher fees.

The Difference Between the 5% Down Payment and the 20% Down Payment

To illustrate the difference between the 5% and the 20% down payment, we will make some calculations. Imagine that the price of a house is $300,000, and the interest rate is 4.25%. The loan is for a period of 30 years with a fixed mortgage. Investor A establishes that the minimum down payment for investment property is 5%, while investor B decides that the minimum down payment for investment property is 20%. It is possible to state immediately that investor A is borrowing a bigger amount than investor B. Therefore, investor A will experience a higher interest rate. Additionally, he/she will need to pay a private mortgage insurance. Thus, the general monthly mortgage payment is going to be higher. Therefore, that real estate investor will pay to the bank a huge amount of money, which could have been avoided and used in order to make money in real estate. If you have the possibility to do so, put a bigger down payment.

Loan Options for Investors

When it comes to buying investment property, financing can be a great challenge, especially for people purchasing their first rental property. Most lenders require real estate investors to put down a substantial down payment before closing on a property. Here are a few different types of home loans available for investors along with the average down payment for each:

Conventional mortgages– Depending on your credit and income, you can finance your real estate investments with a traditional mortgage, with the payments spread out over 15 to 30 years. Such loans are available via online lenders, credit unions, and banks. The down payment could be as low as 10% of the purchase price, however 20% is more common. The down payment for investment property for this financing option could even go up to 25% for multi-family homes.
Hard money lenders – Such lenders are more concerned with the viability of your real estate deal than your credit or income. This option works best for investors that are planning to refinance or sell the property quickly. However, the down payment can be high depending on the lender. It can range anywhere from 10%-25%. Some hard money lenders won’t require a down payment but, in this case, the interest rate may be higher and they will take your credit score into consideration.
Private money lenders – Some wealthy friends or family members might be willing to offer you a loan for buying an investment property. However, the down payment is unpredictable in this case as it depends on who you turn to. But if you’re turning to private institutions, it may range from 10%-20%.

For the average American, saving for a 20% or more down payment can be a very long and painstaking process. The good news is that there are lenders that offer investment property loans with low down payment.

Loans Requiring Little or No Money Down

So, where can property buyers find investment property loans with low down payment? Here are some options available for real estate investing:

1. VA Loans

This no-money-down loan is guaranteed by the U.S. Department of Veteran Affairs. VA loans are offered to active members of the U.S. military, as well as those honorably discharged from service. Individuals that have served for at least 6 years in the National Guard or Reserves also qualify. So do spouses of personnel killed in the line of duty. Here are some of the advantages of a VA loan:

Mortgage insurance is not required
Buyers may use intermittent occupancy (You must certify that you intend to occupy the property as your home. Second homes and investment properties do not qualify for a VA loan. However, there are legitimate reasons that you can move out and keep the loan. The most common are you’ve outgrown the house, you were transferred to another area, )
Bad credit and bankruptcy don’t disqualify you immediately

2. Federal Housing Administration (FHA)Loans

The Federal Housing Administration does not give loans; rather, it is an insurer of loans. The FHA has some guidelines for the loans that are eligible for insurance. When a lender funds a loan that satisfies these requirements, the FHA accepts to insure that mortgage against loss. Also referred to as 203b mortgage loans, FHA loans require a down payment of only 3.5%. However, real estate investors have to live in one unit of the rental property to qualify for this low down payment. This is referred to as house hacking or the owner-occupied multi-family real estate strategy. FHA interest rates are much lower compared to traditional mortgage loans, and borrowers can qualify even with a credit score below 600

3. The HomeReady Mortgage

Backed by Fannie Mae, HomeReady mortgages are home loans that are designed to help moderate- and low-income borrowers refinance or buy property. These loans come with reduced mortgage insurance costs, low mortgage rates, and innovative underwriting. They are also flexible about accepting contributions from other people. Borrowers can use the income of everyone living under the same roof to get approved for a mortgage. For instance, if a property owner lives with their spouse and children who earn an income, he or she can use their earnings to help qualify for a loan. HomeReady loans are investment property loans with low down payment of 3%. However, real estate investors of multi-family homes will need to house hack to qualify for this loan.

Investors that want to refinance or buy with HomeReady must fulfill the following financial requirements:

Minimum credit score of 620
Participation in home ownership education
Income equal to or less than the area median income (AMI)

You can check Fannie Mae’s HomeReady eligibility page to find out the AMI of your home address.

4. The ‘Piggyback Loan’

Also referred to as the 80/10/10 loan, the ‘piggyback loan’ is, in reality, two loans designed to offer property buyers lower overall payments and added flexibility. With its 80/10/10 structure, buyers first bring a down payment of 10%. The remaining 90% is split into two parts; 80% is a traditional loan via Freddie Mac or Fannie Mae, while the other 10% is a home equity line of credit (HELOC) or home equity loan (HELOAN). HELOCs are more preferable since they offer flexibility in the long term. However, the loan structure can be adjusted to help borrowers access the best pricing available.

Conclusion

Besides expenses such as title insurance, lender appraisal, and home inspection, the down payment is the biggest closing cost in property ownership. The financing tips above can come in very handy for anyone that wants to know how to invest in real estate with little money. However, even though investment property loans with low down payment can be very helpful, such loans can water down your offer. Some sellers are reluctant to sell when buyers come backed by some of the loans listed above. Sellers usually prefer traditional 20% down payment offers to lower down payments. Keep this in mind as you explore your options.

478: Best of Fun Facts Friday – How to Acquire Investment Properties with Little or No Money Down

SHOW NOTES FOR EPISODE 478: BEST OF FUN FACTS FRIDAY – HOW TO ACQUIRE INVESTMENT PROPERTIES WITH LITTLE OR NO MONEY DOWN

Is It Better to Have a Bigger Down Payment?

The Difference Between the 5% Down Payment and the 20% Down Payment

Loan Options for Investors

Loans Requiring Little or No Money Down

1. VA Loans

2. Federal Housing Administration (FHA)Loans

3. The HomeReady Mortgage

4. The ‘Piggyback Loan’

Conclusion

Other Links for Little or No Money Down

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