CREATIVE METHODS OF
RAISING CASH FOR REAL ESTATE
If you were to call a lender today and say, "I just
found this great home for $100,000 dollars and I want you to lend me $90,000 and
I'm going to borrow the other $10,000 from my credit union.", that lender
would say, "no". The
general rule is that a lender will not allow you to borrow the down payment for
the purchase of a property and if
they find that you do, no matter how well off you are financially or credit-wise,
your loan will be turned down. Their
reasoning is that: "If you are not good enough at handling money to save
the down payment, then you're not a good enough credit risk for us to lend you
The exception to this rule is
that if you are borrowing the money against an asset that you already own, then
the lender will allow it. This
exception opens up many possibilities for the person with assets but little
cash. Are you a car buff with a
valuable classic? Do you have a
house full of beautiful furniture? Or a great stereo system?
Whatever the case, you can go down to your local finance company and take
out a loan using that asset as collateral and use the money as a down payment on
that property you're after; and contrary to popular belief, you probably don't
need to raise as much as you think. If you, were buying the above mentioned
property with an FHA loan, the lender would require a total investment on your
part of only about 6% to 7% of the sales price (in many cases, even less),or
around $6,000 dollars, and that includes down payment and closing costs. So, on
a property that costs $50,000, you would only need to raise about $3,000.
Here is an actual example of this method in use...
I had a couple walk into my office who wanted to buy a big
luxury home with about an acre of land and they felt they could afford payments
of about $900 dollars per month. They
had two problems no cash and a combined income of only about $1,700 per month.
Although, they felt they could afford $900 per month, with $1,700 per
month income, there was no way a lender could be convinced, especially with no
down payment. So, at first glance
their case was hopeless. However,
they had one asset... Four years prior, they had bought a home.
I decided there was probably a way to work it out; so we
went house hunting. In no time we
had found the perfect home for them; 4 bedrooms three baths and about three
quarters of an acre. The price was
$113,000 dollars. But there was
still a problem. Not enough income
to qualify and no down payment. Here's
what we did...
lenders, usually savings and loans, have what is called a no qualifier loan.
What this means is that if
you have good credit and put, at least, 25% down, they will not require
the usual, time consuming verifying of
income. They will take at face
value whatever you tell them you earn.
I knew that if we could raise the 25% down, about $30,000, we could
get my clients qualified by simply stating a higher income for them.
But where to get $30,000?
As I said earlier, they had bought a home.
They now owed $40,000 against it but it was worth about $80,000. Some
banks will lend up to 90% loan to value on owner occupied properties.
In other words, if you live in the
property they will lend up to 90% of its value minus any existing encumbrances
(loans). So, if the property is valued at $80,000 with $40,000
owed against it they will lend $72,000 minus the $40,000 encumbrance or $32,000.
I had my clients do exactly that.
They got a second mortgage of $30,000 dollars and used it
all as a down payment on the home they were buying. Since they were now, putting over 25% down on this new home,
we were able to use the "no qualifier" loan. The end result was that they got the home they wanted, and
because of the large down payment, they got monthly payments that were actually
a little lower than they were expecting. The
lender was happy because they made a loan, and my clients were able to budget
their money so as to be able to make their payments.
And to top it all off, their other house is now a rental that brings in
$100 dollars per month more than they owe on the loan payments.
Pretty good for someone with no cash and little income...