For decades the way to finance a property purchase was know as the 80-20 deal, 20 percent down, 80 percent on loan. Of course there has always been those who put more down, but 20 percent was considered the bare minimum. Happily for many this standard has changed.
You can now find more then a dozen or more ways to finance a property purchase, whether the purchase is for pure investment or primary residence. One common method is to have more than one loan usually in the form of a second mortgage. The buyer puts five percent in and effectively borrows the other fifteen percent on a separate loan, usually at a much higher interest rate.
While it is nice to invest less for the same property, the downside is not limited to the higher interest rate on the second mortgage loan. Since the buyer does not meet the standard 20 percent minimum the lenders almost always require
private mortgage insurance (PMI). These fees are usually rather hefty.
And though it is possible to have the lender remove the PMI requirement after enough payments have been made it rarely happens. In theory, once the loan(s) have been paid down to the point that the LTV (loan-to-value ratio) is at 80 percent — usually by a combination of paying down the second mortgage and appreciation of the value of the property — the lender will be willing to consider removing the PMI cost from monthly payments. Most often before that happens though the loan is refinanced or the property sold.
The ambitious investor can find other sources of financing. When considering property in a new development, such as a planned community or new housing tract, manufacturers will often be willing to fund a home loan for early buyers. Such loans are frequently available at only 5 percent of the purchase price.
For the really daring it's possible to 'buy' a property, then sell it, without ever owning it — at least not for long. It's possible to buy a property, establish a contract, and then sell the contract for anywhere from $500-$5,000 without ever taking possession or even being on the title. Profits are usually smaller, but obtained quicker, although deals require excellent credit.
Sub2 deals are another form of creative financing. The typical 'subject-to' deal involves having a seller deed you the property while leaving the existing mortgage in place. You never legally assume the loan, but simply start making the payments. There are lots of variations on this new way of buying property and it is not recommended for the beginner.
You can finance a property investment by forming a limited partnership. Arrangements cover the spectrum. In some deals each partner puts up a percentage of the cost, usually half and half, but sometimes profit is apportioned according the original percent invested. In some cases it is possible for one partner to invest money, while the others performs some service —— such as repairs on a 'fixer-upper'. The deals are as varied as the people who make them.
For those with low incomes, or military service, or other special circumstances various government loan programs are available — though they are usually limited to individuals intending to occupy the property.
It is even possible to fund a property purchase with credit cards, but there are several obvious downsides to this method. Apart from the substantially higher interest rates, lenders look at all outstanding debt when judging whether to grant a loan on the remaining balance. Taking out a cash advance to cover a shortfall between the needed 5-20 percent down will usually get you turned down.
Friends, family, and other sources of money are usually viewed the same way unless you can prove to the bank that the money is a gift and not a loan.
The bottom line is that mortgage lenders have seen it all so don't try to fool them.
