Advertisements constantly hammer us with the fact that anybody can qualify for a mortgage with no money down. Buying real estate can and should be a quality financial investment. Purchasing a piece of real estate, whether as the primary residence or as an investment property with zero money down can be either a very smart move or a very dumb move depending on how the real estate investment is handled.
Almost everybody has seen the infomercials where they promise incredible riches free. The only catch is that you must frequently spend an exorbitant amount to purchase their product to tell you how it is done. The recent surge in real estate, financing and mortgages, have made these programs almost obsolete. The main difference here is that these offers are frequently “no money down” offers for brand new homes.
These mortgages are sometimes known as “One Tens” or even “One Twenty’s” because they allow the real estate investor to literally finance one hundred and ten percent or even occasionally to finance one hundred and twenty percent of the total value of the home. This additional money is sufficient to cover closing costs, escrow accounts, appraisals and other expenses commonly associated with real estate investments.
If the real estate investor is purchasing the home as a primary residence, these loans can frequently make the whole process easier. These loans are rarely a good idea for the real estate investor who is looking for a safer and more secure financial investment portfolio however.
The very fact that an amount greater than the total value of the home should be the first clue that this type of mortgage or loan needs to be more closely examined. Financing a home or any piece of real estate for more than the actual value results in the real estate investor being “upside-down” with the loan. Very simply this means that the mortgage holder now owes more on the real estate than the fair market value would allow the property to be sold for.
If someone has had difficulty being financed in the past, these loans can often be a good way to overcome that. Home financing has always been a difficult proposition, even with the best mortgage brokers and lending institutions. This solution is best suited to someone who will be purchasing a home as a primary residence. It is wise for them to inspect the terms of the mortgage closely however, as most of these mortgages are variable rate loans. This means that as the interest rates fluctuate, so will the mortgage payments. Care should be taken that the real estate investor will be capable of making the payments consistently for the length or life of the mortgage.
For the real estate investor who is looking to purchase a home as an investment, whether as a rental property or for a quick sale, these types of mortgages are not a good idea. The resulting upside-down payments will make it impossible for the investor to quickly turn around and sell the property for anything other than a financial loss. The high costs of the mortgage and subsequent interest from having such a large loan will prevent the real estate investor from renting the property for any profit at all. The end result for the real estate investor is going to be an annual tax write-off of some proportion.
Buying a home with no money down can be a very wise investment. As with any financial investment of this magnitude, care should be taken to make sure that the loan or mortgage on the property are within the financial means of the real estate investor.