How to Buy a House When You Have No Money

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

FHA loans are the best option for homeowners to buy 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 for investors. And you may need to tap another source for funds above this hard money loan.

In the following article, I’ll cover 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 don’t have many options.  However, an FHA loan lets you get as close as possible and purchase 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 lend money to homeowners.  Instead, it insures several 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 the risk for these lenders. And it allows them to provide loans with outstanding terms. Borrowers receive the following advantages:

  • Low down payments: Conventional loans generally require 20% down payments. Accordingly, FHA loans allow borrowers to buy homes with little up-front money relative to conventional mortgages. You can purchase a home with as little as 3.5% down with an FHA loan.

  • Lower credit requirements: FHA loans have lower credit requirements for borrowers.  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 upfront (instead of 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: You need to put together at least 3.5% down if you want to secure an FHA loan.  There’s no getting around that requirement.  But, the FHA allows you to use financial gifts from friends and family to cover that requirement.

HOW TO BUY AN INVESTMENT PROPERTY 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 buying 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,” the property.  They don’t concern themselves with the borrower’s income, credit, and debt-to-income (their “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.

Option 2: Business Line of Credit

As the name suggests, this first option requires that you have an actual business.  If serious about your investing, you may have 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 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).  You receive a lump sum with a loan, and then you pay it off over time—a line of credit functions more like a credit card.  You qualify for a specific 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 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.

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 their business, serves as the collateral.  As a result, you need equity in your home to open one of these.  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.

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, you receive a single lump sum with a home equity loan, and you pay 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, making 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.

Home equity loans represent an excellent option for investors who need to bridge the gap between a hard money loan and rehab costs.  Let’s say you take out a $50,000 loan.  Assuming you properly analyze deals, you’ll always have that $50,000 to cover expenses over bridge loans.  As you exit every sale, you’ll both pay off the bridge loan and receive that $50,000 back and the deal’s profit.  And, as you keep using this $50,000 repeatedly, 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 means that you finance your investment needs, so you don’t need to pay any money now.

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.  They may offer you a loan (not a 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 be eligible immediately.  You can quickly and efficiently access cash to fund an investment property deal.

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 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 participating in a deal’s operations.  This has a two-fold advantage.  First, you receive the funds for a sale without contributing 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 is 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. Instead, 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 with 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 invest passively.  They could form Bob and Sarah, LLC as an umbrella investment entity (NOTE: LLCs offer more flexibility than partnerships but are generally treated as partnerships for tax purposes).  Sarah contributes cash as part of the LLC’s operating agreement, 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 setup provides the primary advantage of stability.  You know that you’ll have enough cash to cover the difference between a hard money loan and the project’s total costs with every deal.  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

Buying a house with no money poses a challenge for primary home buyers.  But it is possible with an FHA loan and the right circumstances.  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 options all provide investors with proven ways to fund projects without their own money.

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