IS IT REALLY POSSIBLE TO BUY REAL ESTATE WITH NO MONEY DOWN? LEX LEVINRAD
Firstly, the definition of no money down does not
little smarter than the average bank. He can
mean “no money down”. It simply means none of
actually go out to the property and inspect it
YOUR money down. It could be Uncle Bob’s
himself. After all, if you don’t pay him, then he is
money, the sellers’ money, or a loan from Aunt
going to get the property, since he has the first
Sally. It could also be a credit line, a private
mortgage. So Uncle Bob is going to need to have
investor, hard money lender, or anyone else for
enough
that matter. It is very important to understand this
comfortable that, if you don’t pay him and he gets
concept. Now, if you were to purchase a house
your house, that he will have a deal.
knowledge
of
real
estate
to
feel
and put down 20%, which you borrowed from your
relative, then you would have purchased the house
Uncle Bob is going to do his own comps and is not
with no money down. You can call it 100%
going to rely on an appraiser. Uncle Bob is going to
financing or whatever you want to call it. As far as
spend days or even weeks investigating the
the bank is concerned you put down 20%.
property compared to the 30 minutes that an out of
However there is a problem with that since as
state loan officer looks at a file. If Uncle Bob is
many mortgage brokers will tell you, banks want to
convinced that your deal is a good deal, then he is
know the source of the funds. When they see that
going to loan the money. If you are paying him
the funds are borrowed and that you have no “skin”
10% interest and the bank is only paying him 2%,
(your money) in the deal, then they will reject the
then Uncle Bob will make more money loaning on
loan.
real estate compared to having his money in the
bank. If Uncle Bob has done his homework, then
So, what is an investor with no cash going to do to
he will only fund a deal at 60% LTV or less. What
get around this problem? The solution is to borrow
this means, is that if he thinks the house is worth
ALL of the money to purchase the house for cash.
$100,000, he will only loan you $60,000 and no
If you borrow all of the cash from Uncle Bob, then
more.
you can be a cash buyer. If you are a cash buyer
then you can buy bank owned REO properties at a
substantial discount to market value. But Uncle
Bob is not going to feel comfortable loaning you
money to buy a house, unless there is substantial
security for him. Since banks loan money at loan to
value (LTV) ratios of 70%, Uncle Bob might be
especially cautious and only agree to loan money
at 60% LTV. Is this risky for him? Well it is less
risky than conventional mortgages that are funded
by banks. Why is it less risky? Well, conventional
banks loan based on a mortgage application, a
credit score and an appraisal. But Uncle Bob is a