100% financing, does it really exist?
100% financing, does it really exist? Yes and no. So too begin why I even choose this subject. Around August or September of 2014 I had been hearing this radio advertisement stating that they could show consumer how to purchase property with no money down. So 3 to 4 times monthly I get calls from new investors who want to know the qualification for obtaining a hard money loan. I am figuring that this is people who have attended this seminar and now they are ready to try out what they learned.
So to begin if you don’t have any money, who do you expect to lend to you? Second if you have bad credit, that is usually grounds for a turn down. Now let me put clarity on a couple of things that the new investors love telling me. “I found this property for $20,000 and after the ARV the property will be worth $150,000″. So as I listened as they tell me the scenario. It does not take long to figure out that he did not have a clue! So I asked him what is ARV, his answer was ” I don’t know”. So with a deep sigh I explained what ARV is. ARV means After Repair Value. So who ever gives the seminars really stress that they can get a hard money, based on the ARV. So my next question is do you know what a Hard Money Loan is. In so many words no, they don’t have a clue. So to explain a hard money loan I must first explain what a Conventional Loan is. A Conventional Loan is a loan that is based on ICE. Okay ICE is Income Credit and Equity. So lenders determine if they will loan you money based on your ICE. So now a Hard Money is usually based off of the equity in a property that you own, not one that you are trying to purchase! Although after the housing crash in 2007 it changed the way lenders lend money. Now Hard Money Lenders want to see credit with equity. Credit can kill a deal if its horrible (550 or lower). So the difference between a Hard Money Loan and a Conventional Loan is that what you need to qualify for a loan. With a Hard Money Loan it is generally Equity and Credit.
Now an Asset Based loan is a loan that is based on the equity in the property. If you own a property free and clear and you get a loan to pull equity from the property, that is a Asset Based Loan! Now because you are buying a property with equity. Please remember that is not your equity, its the sellers equity, until you buy it!
Now lets get back to the Myth of the 100% financing. 10 years ago it did exist, but in this day and time, no it does not! Nothing is more frustrating to me than someone who blew smoke and filled people heads with the ideal that they can buy property with no money down. “REALLY”. Let me break it down a little more. If a lender did loan you $100,000 dollars to fix and flip a property and it did not cost you 1 cent. So what if you are working on the property and a problem pops up that is going to cost you $20,000 more than what the Lender Loaned to you, what are you going to do? You are vested in the deal because you are overseeing the project. Yet you don’t have credit and no money, and believe it or not this is the easiest loan to walk away from. Now imagine that you walked away from the loan, and the lender is stuck with the property for $100,000 that you were suppose to rehab. So the money that they had is now sitting in real estate which is waiting to be sold.
Now this is the reality that everyone must face, all lenders want you invested in a deal. Conventional lenders prefer around 10 to 20%. Hard Money lenders prefer 30 to 40%. When you are invested in a deal, nobody wants to loose there money. So they are going to fight harder to not let the deal fall. So here is something else if they loan you $60,000 dollars on a property that is worth $150,000 they have a better opportunity to come out smelling like a rose.
So I do have some lenders that will loan money on ARV but they have stipulations that you must qualify under or they will not do the loan. 1st and most important credit score must be 700. 2nd area specific. Not all states qualify! I have several lenders that will not lend in Cook County (Chicago, Ill) Cayuga County (Cleveland, OH) and Wayne County (Detroit, MI). Simply because to Foreclose in these states is a process that takes years to complete ( 2 to 3). Who wants to have a few Hundred thousand dollars tied up in property that you can not touch?
Even if a Hard Money Lender want to lend you money for the ARV you still have to pay closing cost, and those are not cheap!
So in reality no there is no such thing as 100% financing, so when you hear that talk, go the other way.