Many real estate investors think that money will make or break a real estate deal. A lack of funds can stop a potential purchaser from bidding on a property.
However, it is possible to purchase real estate with no money from the buyer’s pockets. If the deal is right, the funding can easily fall into place. Alternatively, for could resort to getting a loan to finance your real estate investment.
However, with a bad credit, it might be nearly impossible for you to get a loan. This article will expose you to the different ways you can venture into the real estate industry with no money and bad credit.
- Purchasing Real Estate With No Money Down
- How To Invest In Real Estate With Little Or No Money
- Can Someone With Bad Credit Invest In Real Estate?
- How Important Is Your Credit Score In Real Estate?
- What Credit Score do Realtors Use
Purchasing Real Estate With No Money Down
Although there are many ways an investor can purchase real estate without handing over a down payment at settlement, it’s important to understand the pros and cons of each type of agreement before signing on the dotted line. Here are some examples of no-money-down real estate deals:
Borrow the Money
Probably the easiest way to purchase a property with no money down is by borrowing the down payment. Either find a lender offering a low interest rate, or use a home equity or other line of credit loan, which will still have the tax benefits of a normal mortgage.
You can also borrow from your real estate broker – arrange to borrow the broker’s commission for a short time and use those funds for the down payment.
Assume the Existing Mortgage
Some purchasers can use a “subject to” contract, where the buyer uses the seller’s existing financing for part of the purchase price. Using the seller’s existing financing is especially successful if the current loan has a low interest rate.
Read Also: What Countries Are Good to Make Money in Real Estate
The buyer receives the title to a property in return for making payments on the seller’s mortgage. Research of the existing loan is imperative, however, in that some loans have a due-on-sale clause, which prohibits the new buyer from assuming the mortgage.
Lease with Option to Buy
Many purchasers do not realize that they may be able to rent a property from the owner with an option to buy. Under the terms of the lease/option agreement, the buyer and seller negotiate a sum to be paid at regular intervals for use of the property.
This agreement allows the lessor to purchase the property at a predetermined price during the term of the lease. Usually, a portion, and sometimes all, of the rental payments will be credited toward the purchase price.
Seller Financing
Another easy way to acquire property with no money down is with the help of the seller. For example, a seller may decline a down payment in return for higher monthly payments. Or, the seller may pay for the buyer’s down payment in order to sell the property faster.
Negotiate the Down Payment
Along with everything else in a real estate contract, the amount of the down payment and who pays it is almost always negotiable. A buyer may elect that the seller pay the down payment, or give credit at closing for the buyer’s down payment. A buyer could also request to pay the down payment in installments, whether in monthly installments or as a balloon payment at the end of the year.
Swap Personal Property
Anything you own may be useful as a cash substitute for a no-money-down deal. For example, if the seller is planning to retire, your unused motor home would probably be much more valuable than a cash down payment. Cars, boats, campers, furniture and appliances are all acceptable replacements for a cash down payment.
Exchange Your Skills
A buyer may be able to offer skills instead of cash. Accountants, contractors, mechanics, plumbers, doctors, lawyers, and so on, all have tradable skills that would be useful in lieu of a cash down payment.
Take on a Partner
Finding other cash buyers is another way to purchase a property with no money down. However, this could get messy as other hands get into the deal. To simplify this process, you can organize the deal on a smaller scale by bringing in one or two more people at the most.
In return for their financing, you can promise to take on the responsibilities of putting together the deal and managing the real estate investment. You may also try to work out a similar deal with the current seller.
Take on the Sellers Debts
If you find a seller who needs cash to pay off other debts, you can offer to assume those debts instead of making a down payment.
Offer a Higher Price or Better Terms
Some owners may be willing to accept a higher price for the property, even if it comes in installments, in lieu of accepting a down payment.
Combine Mortgages
If you already own property, you could combine mortgages in order to provide the seller with cash at closing without using your own money. You could also suggest that the seller place a second mortgage on top of the first and keep the cash, while you, the buyer, assuming both loans.
Exchange Property
If you already own property, you may want to exchange it for another property. You could either exchange the property with a buyer, or use it in combination with a small amount of cash to obtain the property you want.
Research, Research, Research
There are certain buyers that may be more suitable for accepting no money down offers on a property than others. If a property has been on the market for a long time or is being advertised as a must sell, the seller may be more willing to negotiate. In addition, as with any real estate investment, always research the property before completing a sale.
How To Invest In Real Estate With Little Or No Money
Investing in real estate refers to any property owned solely for the purpose of generating profit, either through rental income or through market value appreciation. There is no such thing as no money down in real estate because the money has to come from some source.
If you want to invest in real estate with little or no money, you need to develop theability to recognize, understand and even take advantage of other people’s money. You will still need little money for making a down payment, when opting for financing real estate through conventional loans.
A real estate is an asset form with limited liquidity relative to other investments. Any type of real estate investment requires some amount of capital and is also highly cash flow dependent to call it a profitable investment. Investing in real estate by using other’s money is the stamp of authenticity for some of the most successful people in the real estate investing business.
Why? Mainly because these successful investors have grasped the art of investing in real estate with no financial input at all. For the financially strapped investors and the new investors, investing in real estate with no money is an attractive way of testing the waters.
Moreover, all this can be done without necessarily having the credit or financial capabilities to do so. The experienced real estate investors, on the other hand, have realized that making use of other people’s money frees their cash for other investment opportunities and also clears up their available funds.
Investing in real estate is a great step towards achieving that much desired financial freedom. If you want to start earning a consistent & reliable passive income, you need to start investing in real estate
1. Purchase Money Mortgage/Seller Financing
The first proven way to invest in real estate with no money is through seller financing. When buyers are unable to secure a loan from financial institutions, they may opt to seek real estate financing from the sellers. With conventional real estate transactions, the buyers will provide the sellers with the cash, to gain ownership of the property.
However, with a purchase money mortgage, the seller extends finances to the buyer. The buyers will then repay the sellers, with respect to the agreed terms.
2. Investing In Real Estate Through Lease Option
The second proven way to invest in real estate with no money is through lease option. Under lease option, the property owner charges the buyer a monthly or yearly premium, in the form of higher rental payments.
The excess rental fee will then be channeled towards the purchase price. With this type of agreement, the investor is able to purchase an investment real estate using a slightly higher rental fee.
3. Hard Money Lenders
If you have no money to invest in real estate you can opt for hard money lending as a viable funding option. Instead of coming from a bank, the funds used in real estate investment will come from groups or private individuals.
Due to the fact that these types of loans do not necessarily need to go through corporate procedures, they tend to have fewer qualification requirements.
This, in turn, means that they can be secured fast. Moreover, private lenders might be more than willing to back up risky projects. Therefore, the interest charge on hard money loans is higher since lenders are taking greater risks and the terms are normally 12 months or less.
Hard money loans require the borrower to cover closing costs, application fees, appraisal fees, and any other costs associated with the purchase of a property.
4. Microloans
There are a variety of new financing options that have opened up the market for new real estate businesses to profit. As the name suggests, microloans are normally geared towards startups or newer businesses, which require resources to generate further growth. Microloans are much smaller than what traditional financial institutions offer.
The lower balances will, in turn, mean these programs are less strict in their qualification requirements i.e. credit score. A microloan is a good funding option to invest in real estate with no money.
5. Forming Partnerships to Invest in Real Estate With Little Money
Real estate partnerships are common for investing in real estate with little or no money. If you want to invest in a property, but the price tag is out of range, then an equity partnership may be what you need.
An equity partner is an individual whom you bring into a transaction, to help finance a property. There are different ways that partnerships may be structured, and thus it is up to the buyer and the partner to agree on a more viable structure.
6. Home Equity Loans
If you have no money for your second investment in real estate, you can go for Home Equity Loans. Majority of investors tend to capitalize on the equity of their primary home, and then use it to finance the new property.
Banks and several other financial institutions offer different products such as Home Equity Line-of-Credit and Home Equity Installment Loan, which allows the buyers to capitalize on the equity that they already have.
7. Trade Houses
Trading houses is another viable way of acquiring new property. By trading an old property with a new property, you will not only be able to acquire a new property but also avoid the capital gains associated with the selling of a property. This is another proven way to invest in real estate with no money.
With that said, buying an investment property for sale with no money down is not a new phenomenon. Also, it is also clear to us that there is no such thing as no money down in real estate investment because the money is going to come from somewhere.
Apart from the ways discussed above, there are several other ways to buy an investment property with no money down. Invest in real estate today, by choosing any of the approaches discussed above.
8. Special US Govt. Schemes Like USDA Loans
With an end goal to fill underpopulated zones of the U.S., the U.S. Department of Agriculture’s Rural Development office gives mortgages with down payments as low as 0%. These loans are offered only in towns with populations of 10,000 or less.
All things considered, 10,000 is very sizable for most towns, so 97% of the U.S. is secured. USDA loans are zero-down-payment mortgages for rural and suburban homebuyers. These loans go to those who qualify as having low or moderate income.
They’re mainly for borrowers who aren’t wealthy and can’t get a traditional mortgage. To check whether your area qualifies for this loan, you can visit USDA.gov and read their terms and conditions.
9. SBA Loans For Investing in Commercial Real Estate
The SBA works with lenders to provide loans to small businesses. If you’re looking to purchase commercial real estate, the SBA 504 loan is the best choice. An SBA 504 loan is commercial real estate financing for owner-occupied properties.
Business Administration or SBA loans require only a 10 percent down payment by the small business owner and funding amounts range from $125,000 to $20 million. With an SBA 504 loan, money can be used to buy a building, finance ground-up construction or building improvements.
10. By Owning Shares of Real Estate Investment Trusts
A REIT is a real estate investment trust. REITs have a number of advantages, the foremost being liquidity. If you own 20% of an apartment building, you cannot get your money out unless someone else buys your share or the property is sold. When you own shares in a real estate trust, it is generally as easily sold as shares of stock.
You can buy targeted real estate investment trusts such as those in firms that build medical buildings, nursing homes, malls and industrial parks. It is easier to diversify your holdings by owning a variety of REITs, and you never have to manage anything.
The modest downside is that they take a chunk of the profits in administrative overhead before distributing the remainder to shareholders. A related financial product is the real estate mutual fund. These mutual funds are more liquid than REIT shares. They are more diversified, too.
They may invest in REITs, the publicly traded shares of homebuilders, and companies that sell building supplies. Real estate ETFs are simply ETFs that invest in the same sorts of businesses. A REIT ETF is an E TF that invests in REITs.
You’ll have lower returns, but there is less risk than investing in a REIT. In every case, you don’t have to invest in real estate directly, much less manage it.
Real estate investing is the purchase, ownership, management, rental and/or sale of any type of real estate for profit. It is definitely a good idea because real estate offers a unique combination of safety, steady cash flow and strong odds of high capital gains. You may earn less than investing in the stock market at its peak, but neither can you lose everything.
A well planned and executed real estate investment can generate an ongoing passive income, and it can prove to be a good long-term investment if the property value increases exponentially over time. You may even use it as a part of your overall strategy to begin building wealth.
If you are a beginner in real estate investing, it very important to read good real estate books and learn from the savvy investors who have made fortunes by investing in some of the best real estate markets in the country.
Following the housing market decline in 2007, single family rental properties became favorable options for investors, saving in construction or refurbishment prices. The quick turnaround for an owner to rent out their property means cash flow is almost immediate.
For a majority of investors, it is one of the most important decisions they will make. Therefore, choosing a real estate professional/counselor continues to be a vital part of this process.
They are well-informed about critical factors that affect your specific market area, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing and interest rates.
Can Someone With Bad Credit Invest In Real Estate?
For investors with good, bad or ugly credit scores, there are always alternative ways to obtain financing. While some may–or may not–apply for you, the most important aspect is understanding the options made available. Here are some of the common — and not so common — routes for investing in real estate with bad credit:
Hard Money
As a real estate investor with bad credit, hard money lenders are your ticket to success, as your credit score is not a make-or-break consideration. Unlike traditional financing methods, these lenders typically consist of individuals or businesses that provide money with high interest rates and short terms to real estate investors.
In most cases, hard money interest rates range between 10 and 18 percent, with lenders charging additional fees known as “points” — which can add up to anywhere from three to 10 percent of the loan amount.
Hard money loans are typically determined by what’s known as the loan to value (LTV) ratio, which is calculated by dividing the ratio of loan amount with the value of the property. In most cases, hard money lenders will lend upwards of 65 – 75 percent of the current value of the property.
The good news for real estate investors with bad credit is that hard money lenders are paying attention to the value of the deal, rather than solely on an investor’s credit score; their primary concern is the property’s value and the security of the deal.
Private Money
Another form of financing is private money. Similar to hard money, private money lenders are secured from private groups or individuals that set their own criteria, including dictating the terms, fees, rates and guidelines.
For some, credit scores may play a factor, but these lenders are generally looking to diversify their money into other investments, including a healthy return on investment. The most important aspects of a private money loan are:
- Asset-Based Lending: For beginners with bad credit, private money lenders are a terrific resource to have because they are driven by the value of the investment property, rather than credit scores.
- Speed Of Purchase: For investors short on time, private money lenders can fund a loan in as little as seven to 21 days, while banks typically take upwards of 90 days or more to complete.
Wholesaling
Another creative way to invest in real estate with bad credit is achieved through wholesaling. This innovative strategy consist of finding properties that can be acquired at significantly lower market value prices, controlling them through the use of a special agreement, and then finding a buyer willing to purchase your contract.
In most cases, no money down is needed and no credit check is every performed, making it one of the more innovative ways to invest in real estate with low credit scores.
FHA Loans
One of the more popular ways to invest in real estate with bad credit is through an FHA loan. This option, which is mandated by the Federal Housing Administration, a division of the Department of Housing and Urban Development (HUD), requires a credit score of 620 and a minimal down payment of 3.5 percent. Although FHA doesn’t actually make home loans, it does guarantee the lender will be repaid if you default on the loan.
While you can still get an FHA loan with below-average credit, there are some guidelines. For one, applicants must have a two-year history of steady employment, including paying their bills on time.
For self-employed investors, you’ll need to provide documents of your income with tax returns and financial statements from your business. Other qualifications include: minimum credit score of 600; not delinquent on a federal debt such as student loans or income taxes; and two years removed from Chapter 7 bankruptcy, and three years removed from a foreclosure.
The credit structure of FHA loans could potentially change in the upcoming future. According to a relatively recent report, the National Association of Realtors (NAR) and HUD are working together to reassess the entire credit structure, as well as locate ways to increase the availability of credit to qualified borrowers who are good credit risks.
“We’ll look at every option that brings housing opportunities within reach of more Americans,” said HUD Secretary Julian Castro.
While FHA loans typically cannot be used to finance an investment property, they have their place in the investor landscape; this includes refinancing an existing FHA loan or purchasing a duplex.
Subprime Loan
Another underrated option, which is starting to make a big comeback, is subprime mortgages. This alternative course of action offers different types of non-qualified mortgage programs, which are designed to assist those with below par credit scores.
While a minimum credit score is required, many lenders have multiple programs in place for specific scores, making them very appealing for real estate investors with bad credit.
Having a quality credit score is a critical component for real estate investors because it’s a necessary ingredient to borrow money. Understanding the options available to you, including what’s required and how to obtain it, is the first step to investing in real estate with bad credit. How important is your credit score in real estate? It’s very important, but it’s not by any means a deal breaker.
How Important Is Your Credit Score In Real Estate?
The importance of a quality credit score should never be undervalued, especially for real estate investors. Great credit equates to better deals and money saving tactics — which, in return, provides multiple options to finance real estate and navigate the mortgage lending process. The secret is understanding how a credit score is compiled and what factors affect it.
A typical credit score is analyzed in points. FICO, the most popular scoring model, ranges from 300 – 850:
- Bad Credit: 300 – 600
- Poor Credit: 600 – 649
- Fair Credit: 650 – 699
- Good Credit: 700 – 749
- Excellent Credit: 750 – 850
It’s also important to note there are several credit scoring models — Equifax, Transfix, and VantageScore — that each have their own evaluation systems, which are based on different factors. Generally speaking, however, a typical credit score calculation is comprised of five major factors:
- Payment History = 35 percent
- Outstanding Balances = 30 percent
- Length of Credit History = 15 percent
- Types of Accounts = 10 percent
- Credit Inquiries = 10 percent
Credit scores are important in the eyes of a lender because it determines what risk you pose to them. It essentially provides a statistical method to determine the likelihood a person pays back the money they have borrowed. The average credit score for a conventional real estate loan is 752.
Scores above 760 are viewed as top tier, with lenders generally offering the best rates and most choices for these borrowers. Credit scores below 620 fall into the subprime category, which can make it much more difficult to locate a loan provider.
“The homebuying process begins well before you start looking for real estate,” Chaplin said. “A credit score, which significantly impacts the home financing process, is built on good spending habits and a pattern of responsible borrowing established over a lifetime.”
Credit scores are built over long periods of time with several key elements influencing them. As a real estate investor, the first step is to pull your credit report and evaluate where you stand.
There are three major U.S. credit bureaus — Experian, Equifax, and TransUnion, and each one uses its own method to determine a score. For those with less than favorable scores, it’s important to realize they can always be improved.
What Credit Score do Realtors Use
The average VantageScore 3.0 credit score from TransUnion for a first-time homebuyer varies even more widely from city to city — from 650 to 753. Below are the 10 cities where first-time homebuyers have the highest and the lowest average credit scores.
On the whole, cities in the Western and Northeastern regions are home to first-time borrowers with the highest average credit scores, which could make it tougher for new homebuyers.
Meanwhile, first-time homebuyers could catch a break in Southern and Midwestern cities since the average credit scores — and mortgage amounts — among new homebuyers in these areas are much lower in comparison.
Remember, VantageScore 3.0 credit scores aren’t the scores most mortgage lenders use when making lending decisions, but they can help give you an idea of the credit health of first-time homebuyers.
| Cities where first-time homebuyers have the highest average credit scores | ||
|---|---|---|
| City | Average VantageScore 3.0 credit score among first-time homebuyers | Average first-time mortgage amount |
| 1. Fremont, Calif. | 753 | $818,397 |
| 2. San Francisco | 753 | $761,022 |
| 3. San Jose, Calif. | 745 | $719,189 |
| 4. Seattle | 742 | $562,826 |
| 5. Boston | 741 | $549,823 |
| 6. Irvine, Calif. | 737 | $613,676 |
| 7. New York | 735 | $469,168 |
| 8. Honolulu | 732 | $491,391 |
| 9. Washington, D.C. | 730 | $501,645 |
| 10. Oakland, Calif. | 728 | $592,001 |
| Cities where first-time homebuyers have the lowest average credit scores | ||
|---|---|---|
| City | Average VantageScore 3.0 credit score among first time homebuyers | Average first-time mortgage amount |
| 1. Laredo, Texas | 650 | $262,613 |
| 2. Detroit | 659 | $171,619 |
| 3. San Antonio | 662 | $286,729 |
| 4. Stockton, Calif. | 662 | $343,050 |
| 5. El Paso, Texas | 662 | $237,844 |
| 6. Baton Rouge, La. | 663 | $260,594 |
| 7. Newark, N.J. | 663 | $336,891 |
| 8. Corpus Christi, Texas | 663 | $271,066 |
| 9. Cleveland | 665 | $179,681 |
| 10. Memphis, Tenn. | 666 | $220,048 |
Think the average credit score in your dream city will be too high or the homes there will be too expensive? Take heart from examples like Newark, N.J., one of the cities with the lowest average credit score among first-time homebuyers.
Newark is located only about 10 miles from New York City and, based on our findings, first-time homebuyers in Newark are taking out much lower first-time mortgages on average than those in New York City — $336,891 compared with $469,168, respectively.
Read Also: How Can One Raise Money For Real Estate Investments
This suggests Newark homes may be cheaper on the whole and could present an affordable alternative for those who want to be homebuyers and stay close to New York City. Similar opportunities could exist around your dream city too, so it’s worth doing your research before committing to, or writing off, any location.
By state
No matter where you live in the U.S., there’s no denying it — buying a home is a big expense. Based on our analysis, the average first-time mortgage amount is $284,356. And there are certain places where first-time homebuying is significantly more expensive than others.
For example, first-time homebuyers borrowing in Indiana got an average mortgage of $195,944, while borrowers in Hawaii got an average mortgage of $527,946 — more than 2.5 times as much.
Overall, our analysis shows homeownership is significantly more expensive along the West Coast and Northeast, while homes remain more affordable throughout the South and Midwest.
| The 10 states with the highest average first-time mortgage amounts | |
|---|---|
| State | Average mortgage for first-time homebuyers |
| 1. Hawaii | $527,946 |
| 2. California | $453,126 |
| 3. Washington | $385,474 |
| 4. Massachusetts | $382,419 |
| 5. Colorado | $370,315 |
| 6. Maryland | $351,286 |
| 7. New Jersey | $350,668 |
| 8. Oregon | $339,199 |
| 9. Nevada | $333,879 |
| 10. New York | $328,564 |
| The 10 states with the lowest average first-time mortgage amounts | |
| States | Average mortgage for first-time homebuyers |
| 1. Indiana | $195,944 |
| 2. Kentucky | $199,255 |
| 3. Michigan | $199,608 |
| 4. Iowa | $201,312 |
| 5. Ohio | $202,072 |
| 6. West Virginia | $207,053 |
| 7. Kansas | $211,455 |
| 8. Missouri | $213,674 |
| 9. Arkansas | $214,542 |
| 10. Oklahoma | $214,807 |
Finally
One of the best things about real estate investing is that it’s open to everyone. You don’t have to have millions in the bank or a good credit score.
You need passion, perseverance, and desire. If you can package that, there’s no ceiling to your success.
Get creative, make connections, and focus on finding the funding to close deals without good credit.
