How to Buy a House When You Have No Money

Money serves as the largest obstacle to buying a house.  As an investor or homeowner, if you don’t have money for a down payment, purchasing a property can be extremely difficult.  As a result, I’d like to use this article to provide some strategies on how to buy a house when you have no money.

For homeowners, FHA loans are the best options for buying a home with little money. You can secure one with as little as 3.5% down. For investors, you’ll need to use a hard money lender to buy a property with no money. And, you may need to tap another source for funds above this hard money loan.

In the following article, I’ll cover some more options for buying a home with little to no money – both for investors and homeowners.

How to Buy a Primary Home with No Money

I’ll be frank here.  If you want to buy a primary home with no money, you really don’t have any options.  However, an FHA loan lets you get as close as possible, letting you buy a home with relatively little down.  And, if you combine this smaller down payment with some of the other FHA loan benefits, you can purchase a home with none of your money.  Here’s how it works:

What is the FHA in Real Estate?

The Federal Housing Administration, or FHA, serves as a government agency designed to promote American homeownership.  In this vein, the FHA doesn’t actually lend money to homeowners.  Instead, it insures a number of FHA-approved lenders (e.g. credit unions, banks, etc.).  When these lenders issue an FHA mortgage loan, the government protects them in case of default.  If the borrower stops paying, the government will pay back the lender a portion of the outstanding loan balance.

This insurance reduces risk for these lenders.  And, this reduced risk allows them to provide loans with outstanding terms.  These terms allow low- to moderate-income Americans to buy homes that they otherwise couldn’t.  More precisely, borrowers receive the following advantages with FHA loans:

  • Low down payments: Conventional loans generally require 20% down payments.  With an FHA loan, you can purchase a home with as little as 3.5% down.  Accordingly, relative to conventional mortgages, FHA loans allow borrowers to buy homes with little up-front money.
  • Lower credit requirements: In addition to offering lower down, FHA loans have lower credit requirements for borrowers.  And, even if you fall beneath the minimum requirements, you can still qualify for a loan.  However, you may need to put up to 10% down.
  • Sellers can pay closing costs: Many first-time homebuyers don’t anticipate closing costs as an expense.  These transaction-related costs can add up to thousands of dollars, and buyers typically need to pay them up front (as opposed to rolling them into the mortgage).  FHA loans allow buyers to request that sellers cover these costs.  And, while many sellers factor this into the purchase price, it still means less up-front money to buy a house.
  • Buyers can use gifts to pay the down payment:  If you want to secure an FHA loan, you need to put together at least 3.5% down.  There’s no getting around that requirement.  But, the FHA allows you to use financial gifts from friends and family to cover that requirement.

Buying a Primary Home with No Money

After outlining the above, you should see that a way technically exists to purchase a house with none of your money.  However, this depends on having some generous family.  If you qualify for an FHA loan, you can purchase a home with no money if both of the below apply:

  • The seller covers your closing costs, and
  • A family member or friend gifts you the 3.5% down payment required for FHA loans.

But, even if you don’t have a generous individual willing to give you a gift, a 3.5% down payment still beats a 20% one.

How to Buy an Investment Property with No Money

Buying a House With No Money Option 1: Hard Money Loan

When buying investment properties, you can get far more creative with financing.  As a result, multiple paths exist to buy a house when you have no money.  Most of these paths begin with a hard money lender.

If you purchase an investment property with a conventional mortgage, lenders will likely require a 20% to 30% down payment.  Enter hard money lenders.  These lenders provide loans based on the “hard asset,” that is, the property.  They don’t concern themselves with the borrower’s income, credit, and debt-to-income (his or her “soft assets”).  Instead, hard money lenders want to ensure that a property’s after-rehab value (ARV) will more than cover the loan balance.  In other words, if a deal goes sour, they depend entirely on the property to recoup their costs.

Every lender differs, but at Do Hard Money, we will lend up to 70% of a property’s ARV.  We’ll use the services of a certified appraiser to conduct an ARV appraisal.  For example, assume that this appraisal determines ARV as $300,000.  We will lend up to $210,000 ($300,000 ARV times 70%).  If your A) purchase price, B) rehab/holding costs, and C) sales-related costs total less than $210,000, you can use a hard money loan to buy a house with none of your own money.

Unfortunately, finding a deal this good can pose a challenge for investors.  Most deals will require more cash than your hard money loan.  But, this doesn’t mean that you need to use your money to bridge the gap.  Instead, you need to find a creative solution to finance the difference between your total costs and your hard money loan.

Buying a House With No Money Option 2: Business Line of Credit

This first option, as the name suggests, requires that you have an actual business.  If serious about your investing, you may have actually registered it as a business.  For example, many investors establish an umbrella LLC that handles the administrative and managerial requirements necessary for individual property investments.  You can structure these in countless different ways.  But, broadly speaking, this umbrella LLC charges individual property LLCs for services, earning income in the process.

Once you have a demonstrated track record of business operations (typically one to two years of tax returns), you can qualify for a business line of credit.  A line of credit provides borrowers a short-term financing option, generally from $1,000 to $250,000, though individual lenders will determine your limits.

Lines of credit differ from term loans (e.g. mortgage or car loans).  With a loan, you receive a lump sum up front, and then you pay it off over time.  A line of credit functions more like a credit card.  You qualify for a certain line of credit amount, but you don’t need to use those funds.  For instance, say you open a $50,000 business line of credit.  You’ll likely need to pay a small administrative fee annually.  But, you only pay interest on what you borrow, and you can borrow funds whenever you want.

Let’s say you need $25,000 to cover the difference between your hard money loan and the total rehab costs.  You can tap your business line of credit, paying interest while using that $25,000.  Then, when you sell the rehabbed property, you use the proceeds to pay off both the hard money loan and the line of credit.  Once you pay off the line of credit, you’ll have access to the entire $50,000 again.

Buying a House With No Money Option 3:  Personal Line of Credit

If you don’t have a formal business, you can still access a line of credit.  However, you’ll likely need to use some personal assets as collateral.  Typically, investors do this by establishing a home equity line of credit.  This line of credit functions the same as a business line of credit; you borrow what you need up to the limit, and you only pay interest on the amount outstanding.  Once you pay it off, you have access to the entire limit again.

However, home equity lines of credit differ from business ones in that the borrower’s personal residence, not his or her business, serves as the collateral.  As a result, to open one of these, you actually need equity in your home.  Every lender will have different loan-to-value (LTV) requirements, but let’s say one allows a home equity line of credit, or HELOC, up to 80% LTV.  Assume your home appraises for $250,000, and you have $150,000 outstanding on your mortgage.  In this scenario, you’d be able to create a $50,000 line of credit ($250,000 value times 80% minus $150,000 mortgage balance).

Qualifying for the HELOC poses the largest administrative obstacle.  But, once it’s opened, you can tap these funds as often as you’d like.  You only pay interest on what you borrow.

Buying a House With No Money Option 4: Home Equity Loan

While HELOCs offer tremendous flexibility, some investors prefer home equity loans.  This loan parallels a HELOC in that you borrow against your home’s equity.  However, with a home equity loan, you receive a single lump sum, and you pay off that loan balance over time (similar to your initial mortgage).  In this respect, home equity loans provide a level of predictability.  You’ll lock in an interest rate for the duration, so you’ll make the same payments every month.  Conversely, HELOC interest rates tend to fluctuate with the market.  If market rates shoot up, your interest payments will also increase.

For investors who need to bridge the gap between a hard money loan and rehab costs, home equity loans represent a great option.  Let’s say you take out a $50,000 loan.  Assuming you properly analyze deals, you’ll always have that $50,000 to cover costs in excess of bridge loans.  As you exit every deal, you’ll both pay off the bridge loan and receive that $50,000 back – in addition to the deal’s profit.  And, as you keep using this $50,000 over and over, you gradually pay off your loan balance.  With a HELOC, you’ll always need to pay interest on borrowed funds.

But, investors should recognize that, using a home equity loan doesn’t mean you don’t pay any money.  It just means that you finance your investment needs, so you don’t need to pay any money right now.

Buying a House With No Money Option 5: Credit Card Loan

If you’ve had the same credit card for a while, you’ve likely received an offer for this type of loan.  In essence, credit card loans are unsecured personal loans.  In other words, no collateral (e.g. a house or car) backs the loan.

Credit card companies monitor how much of your credit you access.  For instance, assume you have a $25,000 limit on a card, but you don’t use more than $1,000 each month and always pay the entire balance.  The credit card company would see you as a reliable borrower.  As such, they may offer you a loan (not line of credit), for a part of the limit you don’t regularly tap.  In this example, you may be able to qualify for a $20,000 credit card loan.  While the interest rate on this loan will typically exceed that of a home equity loan, you can likely qualify immediately.  This means you can quickly and efficiently access cash to fund an investment property deal.

Buying a House With No Money Option 6: Find a Business Partner

All of the above options involve finding your own ways to finance your investment cash needs in excess of a hard money loan.  However, another option exists – find a business partner.  That is, meet your cash needs with someone else’s money.  You can structure deals in countless ways, but broadly speaking, two partnership models work: deal-by-deal or recurring.

In a deal-by-deal partnership, you solicit investment partners for specific deals.  Generally speaking, this works when you have the real estate expertise.  You’ll serve as a deal’s general partner, planning, executing, and managing the day-to-day operations of an investment.  On the other hand, the limited partners serve as the “money partners.”  These individuals provide you money, and they get a return on their investment without actually participating in a deal’s operations.  This has a two-fold advantage.  First, you receive the funds for a deal without needing to contribute your own capital.  Second, these investors earn passive income. Win-win.

With this system, you bring in different limited partners for every deal.  While some people may invest in multiple deals, each deal serves as a standalone investment.  Of note, we help investors structure these sorts of deals all the time.  Feel free to drop us a note for help setting up a deal like this.

Alternatively, investors can establish a recurring partnership.  With this approach, the legal entity exists outside of individual deals.  Rather, you bring in a partner who enters every deal with you.  This partner can either be involved in day-to-day operations as a general partner or only contribute funds as a limited partner.  Regardless of your agreement, this other partner can contribute capital, providing you the money necessary to pursue new deals.

Here’s one way to structure a partnership like this.  Assume Bob has real estate expertise and wants to manage the deals, and Sarah has cash she’d like to passively invest.  They could form Bob and Sarah, LLC as an umbrella investment entity (NOTE: LLCs offer more flexibility than partnerships, but they are generally treated as partnerships for tax purposes).  As part of the LLC’s operating agreement, Sarah contributes cash, and Bob handles day-to-day operations.  And, LLCs allow you the flexibility to allocate profits however you’d like.  This means that Sarah and Bob could structure their agreement in whatever fashion that best supports their investment return requirements.

This set-up provides the major advantage of stability.  With every deal, you know that you’ll have enough cash-on-hand to cover the difference between a hard money loan and the project’s total costs.  And, you won’t need to spend time and effort soliciting new investors for every deal.  However, a recurring partnership also means that you’ll always need to split profits with this partner (or at least, you’ll need to as long as the partnership exists).

Final Thoughts

For primary home buyers, buying a house with no money poses a challenge.  But, with an FHA loan and the right circumstances, it is possible.  For investors, far more options exist to buy investment properties without money.  However, once you exceed your hard money loan, you’ll need to get creative if you don’t want to contribute any money.  The above does not serve as a comprehensive list.  But, these five options all provide investors proven ways to fund projects without their own money.

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