If any of you have trouble sleeping like I do, then you’ve seen the infomercials … Make millions from investing in real estate with no money down!!!! Too good to be true? Not at all!
Save yourself the $399 and don’t buy the program. What they don’t necessarily tell you in the infomercial is that there are ways to buy without spending your own money (a tricky use of semantics), but you will still need cash at closing. And if that sounds good to you, I’ll tell you about the options.
But I’m a realist, and I like to give you practical choices. So while I will let you in on the “secrets”, I will also tell you about programs you can take advantage of that actually offer zero down.
What the infomercials will sell you:
- “Subject To” – You buy houses “subject to” the existing financing. So you leverage other people’s credit and take ownership of the property with the original terms of the note with the initial lender.
- Lease Option – In a nutshell the buyer rents the property for an extended period of time, and has an option to buy it for a specified amount. The rent paid goes towards the down payment.
- Buy to Let – In this scenario the buyer is required to rent out the property and the future rental income is used as collateral. The buyer needs to present a business plan as well as applications from potential tenants.
- Seller Refinance – The seller refinances the home and gets the cash from the proceeds, and the buyer gives the seller a promissory note for the balance of the equity.
- Government Loan Programs – This is the most viable option in my opinion, so I will discuss it in further detail.
- Borrow money from you family or friends for your down payment
- Borrow against your life insurance policy
- Use other property as collateral
- Home equity loan (if you have other property)
- Trade – The buyer trades the seller for something he needs in lieu of a down payment
- Investor – Again … it’s not your money that is being used as a down payment.
Some of these opportunities are more realistic than others. And as I mentioned, several don’t require you to use YOUR money as a down payment, but still require cash to close.
I come from a family of martyrs, so I don’t like to owe anyone anything. The thought of asking a family member or friend for money makes my skin crawl and sends me running towards the bar. I would rather stand on my own two feet and get a loan myself.
I have worked in the real estate industry for nearly 8 years, and I have seen the market highs and lows. I have seen amazing mortgage “deals” come and go. The most reliable programs I have seen come from the US Government. Shocking, I know!
There are two zero-down loan programs offered by the government – VA and USDA. Both have low interest rates. You can qualify for a VA Loan if you meet any of the following criteria:
- Active duty personnel
- National Guard / Reservist
- Surviving spouse
For those of us who have not served, there is another government-guaranteed, zero-down loan program that we may be eligible for and it is worth checking out – USDA Rural Housing Loans. This program was created to improve the life in rural areas, by providing loans and grants for housing and community facilities. The process is quite simple, and is broken down into a few steps.
- Find out if you quality
- Find out if the property qualifies
- Purchase the home
Do I Qualify?
As with any government program, there are requirements for eligibility. For USDA Rural Housing Loans, as with any loan, you must have good credit, the monthly housing costs can’t exceed 29% of your income, your income can’t exceed 115% of the median income for the area, and the property must be owner-occupied.
Know Your Score
Knowing your credit score is always important. Better credit can get you lower interest rates, saving you money in the long run.
If you don’t know your credit score, check out CreditKarma.com. It is a FREE online credit report, and it’s very easy to use (I promise they don’t pay me to say that). CreditKarma also notifies you automatically if there has been a change in your score or someone has accessed your information.
For a USDA loan, the minimum required FICO score is 620. You also must have an established credit history of at least 24 months.
Know the Ratios
You know your credit score – great! There is another set of numbers you need to be familiar with as well, your debt-to-income ratio. Standards for USDA loans are 29/41, which simply means that the housing costs (mortgage, insurance, and taxes) can’t exceed 29% of your monthly income, and your overall monthly debt costs can’t exceed 41% of your monthly income.
Higher ratios may be considered if you have good credit (660+), stable employment history, potential for increased earnings, and proven ability to save. The 29/41 rule is smart to live by so you don’t get in over your head financially, but it can be stretched in special cases.
Know Your Debt
Now that you know what the requirements are for debt-to-income ratio, you need to know your debt load. That is easy to determine, but can be hard to accept when it’s laid out in front of you.
Don’t be afraid of your debt. Fear will hold you back from facing it head on and making progress to get rid of it. I always say this – knowledge is power. If you have debt, understand where it came from and how you can avoid taking it on in the future.
List out all of your monthly expenses. I use an Excel spreadsheet so I have a visual reminder of everything I regularly spend money on. This list may include car payments, student loans, utilities, groceries, credit card debt, etc.
Once you have your total monthly expenses, you will know how much you can spend on housing. Make sure it doesn’t exceed 41% of your total monthly income.
Verify Your Income
Depending on your employment, verifying your income will have different requirements. It can be as easy as submitting a written Verification of Income and a current paystub, or as involved as submitting two years of Federal Tax Returns.
You must report all of your income, which may include alimony, child support, disability, or social security benefits. Also if you have a non-purchasing spouse, his/her income must be verified as well to make sure your income does not exceed the limits of the program.
There are applicable deductions to reach your adjusted income, which should be discussed and verified with your lender. They include minor children, disable or handicapped dependents, full-time students, elderly dependents, medical expenses, and childcare expenses.
Once you reach your adjusted income, you need to confirm that it does not exceed 115% of the median household income for your area. Again, this is something you need to review with your lender to make sure you are eligible.
This is probably the easiest step in the eligibility process – establishing that you will be occupying the home. To qualify for a USDA loan you can’t own another primary residence.
QUALIFIED!!! Once you have proven that you are eligible for the program, you can start looking for properties.
Does the Property Qualify?
Since this loan program was introduced to increase livability in rural areas, you must find a home that fits the guidelines. Rural areas include places with lower populations, and certain towns and cities.
Types of Properties
While they do require that the property is owner-occupied, there is flexibility as to what you can purchase. The property can be a single-family home, condo, planned unit development, or manufactured home.
The rural housing program has recently been updated. According to a Mortgage Officer from Wells Fargo Home Mortgage, there is no limit on lot size, but the land can’t account for over 30% of the value of the property unless it’s typical for the area. Also, farm properties are not eligible – they don’t want buyers making money off of the land.
Verify the Location
There are also location guidelines, and are specific to your area. If you are interested in purchasing a home through the rural housing program, ask your local lender for a map. You can also verify eligibility online at http://eligibility.sc.egov.usda.gov.
Thankfully in many cases, the definition of rural is loose. As long as you don’t want to live downtown, your options might be far greater than you imagine.
Make the Deal
Once you and the property qualify for a USDA loan, all you have left to do is buy it! USDA loans have lots of benefits to buyers as well as the community.
They require no down payment, and there are no prepayment penalties for rural housing loans. They have low monthly mortgage insurance, and offer 30-year fixed interest rates. Closing costs can even be financed into the loan if the appraised value is higher than the purchase price.
ZERO-DOWN REAL ESTATE IS A REALITY
Being the practical person that I am, I always want to give people honest, real-life advice and options. Government-backed loans like USDA or VA are solid opportunities to purchase real estate with no money down. When I say zero down, I mean zero down!
There are riskier choices available that don’t require you to spend your own money, but they do require a financial investment from someone upfront. I don’t discount any of the alternatives – they work. If they didn’t, no one would buy the programs you see on television in the middle of the night.
Next time you find yourself awake in the middle of the night cruising through the channels, skip the ones enticing you with promises of real estate riches. You now have a solid information base to research the choices AND a healthy dose of reality!
And on that subject…
If you want to learn more (well, MUCH more!) about how to make a full time living in the real-estate market I suggest you get Joe Crump’s real estate investing course at realestatemoneymaker.com. Why? Simple…
First, Joe KNOWS his stuff like probably no other real-estate investor knows. From finding sellers who will sell you their home with zero down payment and no credit check, to maximizing your profit potential once you sell the property…and how to systematize your business so you can repeat this process every single day.
Second and most important…his course provides you with more “out of the box” strategies, systematical approaches, exploitable loopholes, and experience based advice (that REALLY WORKS!) than most real-estate products priced 10 to 100 times more!