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Purchasing property with no money down is a viable, smart business practice in today's economic climate. With interest rates still hovering at record lows and competition high, the mortgage-lending industry has created flexible pending standards to attract cash-strapped investors. Now first-time investors are launching their careers, while seasoned investors are finding more motivated sellers.
"The trend in the industry is to get more first-time buyers into the marketplace," explains Doug Duncan of the Mortgage Bank Association of America. "Down payments are the biggest hurdle for these people." Flexible lendersMany lenders are offering programs that encourage sellers to contribute to closing costs, in addition to lowering down payment requirements. Other lenders are selectively raising debt-to-income ratios.
"We understand that people just starting out don't always have the money for a down payment," says Doug Perry, Countrywide Home Loan First Vice President, Consumer Marketing Division. "By evaluating their individual needs, we determine which loan options are best for them." These loans aren't just for small or rehab properties; some are available at amounts up to $500,000.
Lenders are offering products such as the 103 percent loan, which covers closing costs for investors. An 80/20 loan finances 80 percent of the loan as the first mortgage and 20 percent as a second mortgage. This eliminates the need for private mortgage insurance, a considerable cost saving to the buyer. These loans do require credit checks and income verification, and the interest rate of a 103 percent loan runs a half-point higher than more traditional loans.
Renewed profitsWhile many of these mortgage opportunities are designed to help first-time investors, a strong housing market and lower interest rates also benefit the seasoned real estate investor. Many new buyers in the market--place are looking for a primary residence, and are not investors themselves.
They don't have the time or experience to deal with renovations or repairs and are looking for a home that is in move-in condition. This works to the benefit of investors willing to improve less-than-perfect properties.
Investors who buy low, remodel, make slight improvements and resell at a higher market value earn substantial profits. Often all it takes is a few minor repairs, new carpet or a fresh coat of paint for a property to appraise at considerably more than what the investor put into it. Selling or refinancing can then generate a substantial amount of cash back. "We're predicting that 1.54 trillion dollars in residential mortgage applications will be processed in 2001," says Duncan, "with refinancing accounting for 43 percent of that total."
In the current market, offering a higher interest rate may be just the thing to convince a seller to lower the price and reduce or forego a down payment. Since interest is a deductible expense with income property, this can enhance the return to an investor. In addition, investors should be on the lookout for sellers willing to finance, since the return to the seller on a real estate contract or mortgage might yield more than the bond market, CDs or money-market funds. Many investors are also asking the seller to carry a second mortgage that would help expedite the sale. What's ahead"The housing market is still showing remarkable strength in the face of a weakening economy and a weakening job market," says Bruce Smith, president of the National Association of Home Builders (NAHB).
Property investment still continues to produce steady returns. "Mortgage interest rates are low: in the seven percent range for fixed-rate financing and close to five percent for adjustable rate mortgages. And home prices have been increasing substantially, generating equity for home owners," Smith continued.
The future looks bright, even in a dim economy, as motivated sellers are willing to negotiate. Some buyers will pay extra to purchase a home in move-in condition, a plus for investors who can make light improvements to their properties. And lenders are providing loans with decreased or no down payments for first-time investors. "We're putting our faith in people who we believe can pay back their loans. We're putting them in homes they wouldn't be able to afford otherwise," Perry says, "and that's a good feeling."
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