No Money Down Financing Techniques

Within this context, no money down financing of real estate acquisitions refers to the case that the investor borrows or finds in someway the equity contribution that is required to cover the gap between the mortgage loan obtained by collateralizing the property acquired and the purchase price.

Below we discuss some more conventional techniques (let's leave friends and family out of this) for achieving no money down financing of property acquisitions.

1. Use a blanket mortgage to obtain a loan that covers the full acquisition price. A blanket mortgage is in general a mortgage loan that is secured by more than one properties. When pursuing a no money down acquisition of a property the blanket mortgage will be secured by the property considered for acquisition and an additional property (owned by the investor) that has enough equity so that when applying the maximum loan-to-value (LTV) ratio allowed by the bank to the combined value of the two properties will result in an amount equal to or greater than the purchase price of the property that is acquired. Using a blanket mortgage that would allow a low LTV ratio will allow the investor to obtain better terms for the loan (long term and lower interest rate).

2. Use a second mortgage. It is not unusual in the real estate world for the investor to ask the seller to take back a second mortgage instead of a down payment. Also before the current financial and economic crisis, some lenders offered zero down payment or 100% financing loans, which represented either a 1st mortgage exclusively or a combination of a 1st and 2nd mortgage (sometimes referred to as a piggyback mortgage). Using a second mortgage to achieve a no money down financing of a real estate investment requires thorough analysis of cash flows as second mortgages come with considerably higher rates because they are riskier, due to their subordination to the first mortgage.

3. Bridge loans were used a lot before the recent financial crisis to finance the acquisition of below-market-value investment properties. Bridge loans are very short term loans and costly as there is high closing fee and interest rates. In the case of below-market-value purchases (discounted by 15% or more) they were used to cover the down payment gap as the loan is based on acquisition price and not market value. Once the property was acquired it was possible to obtain same day remortgages based on market value, in which case the new loan could cover the full discounted acquisition price of the property, that is, the loan used for the purchase plus the bridge loan amount.

4. Use a hard money lender to borrow the equity fund needed. Hard money lenders provide short-term loans at high interest rates. This type of financing can be used to cover the down payment requirement when a quick resale can be expected with high capital gains.

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