zero down financing
During the recent housing boom there were loan programs that fueled the rapid rise in home ownership. One of the main driving forces behind the boom was 100% financing. This financing made it possible for people to purchase a home with no money of their own committed to the transaction. The loan covered the purchase price of the home and the seller could give a concession to the buyer to pay for all of the buyer’s closing costs, pre-paid items and escrow reserves. Some programs required the buyer to come up with at least $500.00 to put in to the transaction but this made home ownership available to people with decent credit and verifiable income. Later the loan programs became less restrictive as no money was needed from the buyer and income did not need to be verified even for those buying investment properties. Easy loan programs created opportunities for more people to purchase Real Estate. The demand for Real Estate created high appreciation rates in the value of homes. This helped protect banks from losing money on these loans if they had to take the homes back from defaulting borrowers. All of this changed around August of 2007 when the housing boom went bust. One of he main reasons was the elimination of 100% financing. I did not happen over night. The default rates on home loans began to rise and this caused the lender’s and mortgage insurance companies to tighten their lending guidelines. This eliminated certain potential home buyers. The reduction in the number of buyers slowed demand. The increase in defaulting home owners created more homes for sale. This caused home values to slide backward. Lenders responded by tightening guidelines and this exacerbated the process. Soon there were no more 100% financing options for most buyers.
So, there is no more 100% financing as far as most people know. There actually are a few loan programs that do not require down payment funds from the buyer. They are much more limited but are available for a surprisingly large number of borrowers including those with less than perfect credit. Here are a few options:
VA Loan: For veterans who are eligible, this is a great mortgage. It does not require any money out of pocket from the buyer at closing, rates are as good as conventional 20% down loans, and credit scores can be as low as 600. The program even allows the seller to pay off a limited amount of the buyer’s credit debt. Veterans can contact the VA to confirm their eligibility.
USDA Loans: This loan program is available to buyers purchasing homes in certain limited geographical areas. These areas are outside major urban centers but often not too far out. In the Seattle/ Bellevue region these areas include Snoqualmie and northeast Woodinville. Sellers can pay for the buyer’s Closing Costs, rates are comparable to FHA loans. There are income limitations for the buyer but they are not too restrictive. Contact Eastside Professionals for a free analysis of your eligibility.
Down Payment Assistance: This program is available to residents of States or municipalities that offer assistance to home buyers. In the State of Washington this program is available through the State Housing Administration to buyers within certain income limitations. There are no geographical restrictions. The program is named House Key. The state supplies, what is essentially, a second mortgage to replace the normal minimum down payment. Borrowers are required to complete a course on home ownership. Only certain approved lenders can close these loans. This program is available through Guild Mortgage for Eastside Professional’s clients. The City of Tacoma has a similar program for homes in certain restricted locations.
Guild Mortgage Proprietary Program: This option is unique to Guild Mortgage and available to Eastside Professional clients. It works only with properties purchased significantly under current market value. The program is utilized extensively by investors purchasing foreclosed, bank owned and distressed homes. It can be used for anyone even those buying owner occupied properties. The end result is a buyer can be in to a home with little if no money of their own out of pocket. There a certain rules that Guild Mortgage has the ability to work around that other lenders cannot. This is due to Guild’s structure and status with Fannie Mae. The program involves a two step process. The crucial element is the property being acquired must be purchased significantly under current market value. One of the great benefits of the current market is there is a tremendous amount of distressed Real Estate available. I suggest using a Real Estate agent that is familiar with acquiring distressed properties. Some agents have inside contacts with bank asset departments. If you need a referral to a qualified agent I can make an introduction. To make the program work the property has to be purchased at 70 to 75% of the current market value. The process involves purchasing the property with temporary financing that is 100% of the purchase price. That loan is then refinanced in to a permanent loan within 30 days. This process allows us to capture the equity that the buyer captures upon purchasing under market value. We can provide the temporary purchase financing. There are significant costs for this option. The buyer can arrange their own temporary financing but will need help writing a Note and Deed of Trust on the property purchase. Here is an example: buyer purchases a home for $210,000.00 that is worth $300,000.00. The purchase is funded by a temporary loan that costs the buyer $15000.00. The temporary loan is refinanced at a balance of $225,000.00 plus closing costs. This puts the new balance below 80% of the current market value which prevents the requirement of mortgage insurance that any low down payment loan requires. Contact Eastside Professionals for details.
"Zero Down Real Estate Investing does NOT Require 100% Financing!"
Many self-proclaimed gurus will tell you the "secret" of zero down real estate investing. for a price! Well, I'm here to tell you that there is no secret.
The key is to secure an 80% LTV, 30-year fixed rate loan by financing the 20% down payment from a secondary source. Doing this will minimize your upfront out-of-pocket expense as well as your monthly mortgage payment (since you'll generally get the best rate, while at the same time avoiding PMI). Can you say: "best of both worlds"??
Ok, so you like the concept of no money down real estate. But how, you ask, can the down payment be funded with no out-of-pocket cash? Well, you have 4 primary options.
If you've read other pages of this site, then you already know that I like leveraging built-up equity to enable zero down real estate investing. It's how I got started and heck, it worked for me!
A home equity line of credit (HELOC) puts a secondary lien on your home, and functions like a line of credit that you use checks to draw against on an as-needed basis. You'll have to apply for this as you would a regular mortgage, but assuming you have good credit, there are usually minimal-to-no fees or costs involved.
A HELOC is typically tied to the Prime Rate and periodically adjusts. Yes, on my property mortgage page I described the evils of adjustable rate loans, but in this case since the adjustable piece is limited to the amount of the down payment, the risk is greatly reduced (said another way, I'd rather have 20% of the loan fluctuate than 80%).
Like I said, using a HELOC is the exact method I used to get started in this business. That first HELOC made no money down real estate a reality for me, and I have since obtained HELOC products on several of my rental properties to fund future acquisitions.
If you have any equity at all in some real estate, obtaining a HELOC is probably something you should do as soon as you can. Since you do not pay interest unless you tap the line of credit, you can simply hold the HELOC in preparation for your next acquisition, or as an emergency fund.
Now, one word of caution is that leveraging your own home can be risky if you aren't careful – yes, you really could lose your home! So, even though I am advocating this strategy to execute zero down real estate investing, doing so requires careful thought and is a highly personal decision.
That said, as long as you purchase rental properties at reasonable prices, conduct a thorough investment analysis, and coordinate a property inspection, you can manage and greatly reduce your risk.
One high LTV option that avoids PMI is a "piggyback" or 80/20 loan. However, it's nearly impossible to find one of these in today's market.
This option is somewhat risky, but can be effective in situations where you expect to refinance rental property within a relatively short period of time. Click for the scoop on 401K investing.
If you finance 80% of the purchase price, and borrow the other 20% for the down payment from a friend, you've accomplished zero down real estate investing. You can do this by drafting a formal mortgage agreement between you and the other party. Or, you could arrange a profit-sharing agreement whereby the other party gets a cut of your monthly property income and/or your post-sell profit.
6 Responses to Zero Down Real Estate Investing does NOT Require 100% Financing!
regarding getting helocs on rental properties, to fund more purchases, to whom is the heloc issued–you, or the llc?
i would think that the heloc is issued to the llc since it owns the underlying rental property; however, you mentioned that banks almost never issue mortgages to llcs, which is why you have to buy the property with a personal mortgage and then quitclaim it to the llc.
do the banks care less about who is on the heloc?
thanks, and sorry for peppering you with so many questions.
legal note: i understand that anything you write does not constitute legal advice, and i absolve you of any liability regarding my own financial decisions.
Banks will not issue a mortgage or HELOC in the name of your LLC even if you personally guarantee the loan. Although I would love to have my mortgages in the name of my LLC, it’s not possible; you must get the loan in your personal name. Even after transferring the property title to the LLC, this has no impact on the mortgage. This only imacts the title. The mortgage must always be in your name unless you get a commercial loan which is generally not feasible for small-time investors. The important thing is that the title is in the name of your LLC.
Hey all – For those of you who don’t know, bankrate.com is an excellent site for finding zero down loans. The site has a chart that shows property mortgage rates for various lenders, and you can then either apply to them online or call them up. Yes zero down real estate investing is definitely still possible!
Is it only me or does it look like some of the responses look as if they are coming from brain dead folks?
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Solar City Offers Zero-Down Financing For Home Builders
SolarCity, one of the key companies that made solar power more attractive to its potential customers via solar panel leasing (so they won’t have to put the full cost of a solar installation up front), is now offering a policy that enables home builders to install solar panels without paying up front.
This may really help the effort to get more new houses built with solar panels preinstalled, as the upfront cost of solar panels is probably their greatest deterrent, as indicated by the way in which customers have swarmed to solar leasing despite it often being a bit more expensive for them simply buying the panels on their own.
Recently, the governments of Lancaster, California and Sebastopol, California mandated that solar panels be installed on all homes, and in the case of Sebastapol, commercial buildings as well.
SolarCity will certainly accelerate this effort to make solar a mainstream, standard power source on new homes across the country.
Nicholas Brown writes on CleanTechnica, Gas2, Kleef&Co, and Green Building Elements. He has a keen interest in physics-intensive topics such as electricity generation, refrigeration and air conditioning technology, energy storage, and geography. His website is: Kompulsa.com.
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As other commentators have mentioned, a zero down solar lease makes what would have already been a bad deal, monumentally worse.
Leasing solar panels, as opposed to buying them, costs significantly more over the long run and also lowers the value of your home. Purchasing the panels, by contrast, adds value to your home, costs less and you actually get to own the panels too.
“lowers the value of your home”
Even the title of your linked article points that out in its title – Lease May Decrease Home Value.
You wouldn’t happen to be someone employed on the selling side of solar, would you? Those people seem to have very strong anti-lease opinions.
We might not have a scientific study to prove how leased solar panels lower your home’s value, while making it more difficult to sell, but we do have mountains of anecdotal evidence that points in that direction.
SolarCity won’t even let you transfer a lease contract to a new home owner, unless that owner meets their stringent credit requirements with a credit score in the 700 plus range. That alone is unattractive to any potential home buyer.
The fact of the matter is the high installation costs of solar panels already make them a tricky proposition that only works if you can get the cost per KW down to a reasonable rate (hopefully something below $2 per KW). SolarCity’s cost per kilowatt is in the $5 range and you don’t even own the system after the lease is over. Not a smart move in my opinion.
We have mountains of anecdotal evidence that saw palmetto treats baldness, chronic pelvic pain, chronic nonbacterial prostatitis, and urinary problems due to prostate conditions. However actual studies do not support any of these claims.
And we don’t have “mountains” of anecdotal evidence. Just a few here and there statements. Speculation.
You’re sounding more and more like you’re in the business. Any truth in that?
Unfortunately, no money down solar leases and PPAs are two of the most expensive ways to have solar on your roof. A zero down solar lease will typically cost a homeowner more than 3 times what he or she would have paid had the system been purchased instead. In fact you’ll pay so much more for a leased system that it will actually be you, who will be paying for your own repairs, insurance and monitoring many, many times over.
Don’t believe it ? Do the math. Add up your lease payments including the annual payment escalator over 20 years on that $0 down solar lease and then compare that to purchasing an installed system at today’s much lower pricing of less than $2.10 per watt after the incentives are applied, and there you have it. More than 3 times the cost when you lease.
And good luck if you ever want to sell your home with a solar lease attached to it. What home buyer will want to assume your lease on a used solar system, when they can buy a brand new solar system and keep the incentives for tens of thousands less than your remaining lease payments Don’t become a solar sheep. Shop before you sign that 20 year contract !
The manufacture of solar PV is no longer the problem, it is the exorbitant cost charged by the installers. It has been reported here that the cost of production of solar PV has gone down to $0.52/watt but the total cost of installation before subsidies or tax rebates remained high at about $7-$8/watt. Even in the design of the panels, and now the ease of installation has greatly improved to reduce labor, such improvement coupled with the very low cost of solar PV, the total installed price remained almost the same. The installers are therefore gaming the system because they know you are going to get the rebates, so they jack their prices accordingly, and improve their profits. They should pass on the cost reduction to end users. A complete grid-tied PV system right now are available from big box stores at CostCo, Home Depot, Lowes, and you can get it for about $2.00-$2.40/watt complete with inverters and racking setup. You can install the system on the roof yourself as it requires basic carpentry skills, and then hire a licensed electrician to check your system and do the final connection to the grid on your main circuit panel. Licensed electrician for a half day job costs between $200-$400. Your total cost of installation should be a small fraction than what Solar City is quoting you for the option to buy and install the panels.
Or someone has to come out and compete with a cheaper method of installation.
I think your prices are high.
Average installation costs are right about $3/watt in the US. Residential prices are higher than commercial and utility sized installations but are averaging about $5/watt. I wouldn’t be surprised to find that some people are getting charged $7 – 8/watt but that’s far from the average price.
Between the end of 2011 and end of 2012 residential solar prices dropped 29%.
Is your price after or before rebates? I always quote before rebates because it is the total money that went into the project. And all calculations of payback should be based on the total money spent.
Also, I would truly appreciate it if you can name me a few of the companies that are installing at below the average price of $3/watt. Remember that it is the average, so there is high and low to get the $3 average, and am interested in the below average price, unless the $3/watt is the minimum that you can find and not the average.
Those are non-subsidized solar prices.
They come from Greentech Media’s fourth quarter 2012 solar report.
The $3/watt average includes utility, commercial and residential – as I said. It is not common practice for solar companies and utility companies to publicly disclose their numbers. The best way to get a feel for what is happening is to rely on one of the companies like GTM which have inside access.
There is some residential installation happening for under $3/watt. One community organization in LA was installing at $2.78/watt.
Last time I checked with Solar City for an installation that I will pay upfront, the quote as $7.50/watt before rebates. At this price, the project will be a financial black hole that you continue to lose your money compared to investment elsewhere. It is mathematically impossible to recoup the cost if you compute the interest rate on $7.50/watt versus the value of electricity produced by one watt rated panel per year.
In that case I would not do business with Solar City.
You can buy the system for under $2/watt and hire a roofer and electrician to do the installation.
$7.50/watt becomes $5.25 after the federal subsidy. Depending on how sunny your location is that would give you electricity in the range of 20 to 25 cents.
If your cost of electricity is on the high side, say 20 cents, then solar will pay for itself. Remember to use the expected average cost of electricity over 20 years. A current 15 cent rate at 3% averages 20.1 cents.
There are multiple states that get enough sunshine and where grid prices are high enough that even $7.50 -> $5.25/watt solar pays for itself.
Bob’s right. Solar City have no interest in selling you an installation for cash; their business model depends on capturing the tax breaks, available to corporate owners.
Cost after rebate has always been a thorn in my side. I will not get much as I am retired and and don’t make enough to get the 30% Fed part. Also as of now that is going away in 2016. I also agree with Marion above as the cost doesn’t come down when installers can say you will get about $8000 back on a some what average instillation. When it becomes like a Vehicle when you add upgrades to your car it is financed into the loan then and only then will it really catch on like it should. A law that makes possible for a lender to add it without any cost and roll it into your existing loan if they see that you can 0 out your bill and maybe get some money returned to the home owner it would only be a reasonable upgrade. Give any rebates to the lender to make up for any interest rate deficiencies. If there are not any then put it towards the loan as a down payment and further make it cost effective.
It seems thee are still housing developers so clueless as not to offer solar as a standard fitting. What is the value added by the solar lessors? The houses are less valuable with the leasing contract than with a free and clear installation. Would you buy a house with a leased kitchen?
It must be much cheaper to design in solar than to add it afterwards. In fact, developers should be thinking of architecturally integrated solutions where the panels replace the roof tiles.
Yes, and since the price would go into your mortgage you don’t have to find the extra money. But then I’m guessing some banks are not ready to think about PV increasing than the value of the home.
I really doubt that the case with new construction.
And the sales price of a resale is the price. The value of the solar system will be reflected in the appraisal. We already know that the resale market values installed solar.
” architecturally integrated solutions”
Yes. Design the slope of roofs facing in a solar direction optimal for the latitude.
Create ‘whole slope’ solar roofing systems in which the panels are the roof. Attach them to the plywood decking or use metal strapping for sheer instead of plywood. Make the wiring accessible from inside a walk-able attic space.
Moving away from a plywood deck would allow active cooling of the back of the panels.
Offer a full roofing package including skylight, roof door, and vent stack options. Design an attractive trim package.