578: How to Acquire Investment Properties With No or Little Money Down

SHOW NOTES FOR EPISODE 578: HOW TO ACQUIRE PROPERTIES WITH NO OR LITTLE 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 shares information on where you can obtain loans that require 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.

Related: Buying Properties With Little or No Money Down With Brandon Turner

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:

1. 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.
2. 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.
3. 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

The VA loan is a no-down-payment mortgage available to members of the U.S. military, veterans, and surviving spouses. VA loans are backed by the U.S. Department of Veterans Affairs. That means they have lower rates and easier requirements for borrowers who meet VA mortgage guidelines. VA loan qualifications are straightforward.

Most veterans, active-duty service members, and honorably discharged service personnel are eligible for the VA program. In addition, home buyers who have spent at least 6 years in the Reserves or National Guard are eligible, as are spouses of service members killed in the line of duty.

Some key benefits of the VA loan are:

• No down payment requirement
• Flexible credit score minimums
• Below-market mortgage rates
• Bankruptcy and other derogatory credit information does not immediately disqualify you
• No mortgage insurance is required, only a one-time funding fee which can be included in the loan amount

In addition, VA loans have no maximum loan amount. It’s possible to get a VA loan above current conforming loan limits, as long as you have strong enough credit and you can afford the payments.

2. USDA loans (100% financing)

The U.S. Department of Agriculture offers a 100% financing mortgage. The program is known as the ‘Rural Housing Loan’ or simply ‘USDA loan.’ The good news about the USDA Rural Housing Loan is that it’s not just a “rural loan” — it’s available to buyers in suburban neighborhoods, too. The USDA’s goal is to help “low-to-moderate income homebuyers,” wherever they may be.

Many borrowers using the USDA loan program make a good living and reside in neighborhoods that don’t meet the traditional definition of a ‘rural area.’

Some key benefits of the USDA loan are:

• No down payment requirement
• No maximum home purchase price
• Below-market interest rates
• The upfront guarantee fee can be added to the loan balance at closing
• Monthly mortgage insurance fees are cheaper than for FHA

Just be aware that USDA enforces income limits; your household income must be near or below the median for your area.

Another key benefit is that USDA mortgage rates are often lower than rates for comparable low- or no-down-payment mortgages. Financing a home via USDA can be the lowest-cost path to homeownership.

3. Federal Housing Administration (FHA)Loans

The ‘FHA mortgage’ is a bit of a misnomer because the Federal Housing Administration (FHA) doesn’t actually lend money.  Rather, the FHA sets basic lending requirements and insures these loans once they’re made. The loans themselves are offered by nearly all private mortgage lenders.  FHA mortgage guidelines are famous for their liberal approach to credit scores and down payments.  The FHA will typically insure home loans for borrowers with low credit scores, so long as there’s a reasonable explanation for the low FICO.  FHA also allows a down payment of just 3.5% in all U.S. markets, with the exception of a few FHA approved condos.

Other benefits of an FHA loan are:

• Your down payment may come entirely from gift funds or down payment assistance
• The minimum credit score is 500 with a 10% down payment, or 580 with a 3.5% down payment
• Upfront mortgage insurance premiums can be included in the loan amount

Furthermore, the FHA can sometimes help homeowners who have experienced recent short sales, foreclosures, or bankruptcies.

The FHA insures loan sizes up to $822,375 in designated “high-cost” areas nationwide. High-cost areas include places like Orange County, California; the Washington D.C. metro area; and, New York City’s 5 boroughs.

Note that if you want to use an FHA loan, the home being purchased must be your primary residence. This program isn’t intended for vacation homes or investment properties.

4. 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.

5. 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.

Other Links for Little or No Money Down

• 257: The Advantage of Master Lease Agreements in Multifamily Investing – November 13, 2018

• Zero Down Real Estate Investing – August 1, 2018

• 324: How to Become a Real Estate Investor for Only $500 – July 5, 2019

• 138: How to Purchase a Rental Property for Only 3.5% Down – September 22, 2017

• 544: How to Invest in Real Estate for Under $1,000 – August 13, 2021

  500: 16 No Money Down Strategies You Might Not Know – March 12, 2021

• Grants For Real Estate Investing – July 18, 2018

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