Mortgage lenders generally advise borrowers to come to the table with at least a 20% down payment on real estate. This avoids the dreaded Private Mortgage Insurance (PMI), which most lenders tack onto loans with less than 20% down and pays the lender in the event of default. Some lenders have created loans structured to allow borrowers to purchase real estate with no money down while avoiding PMI, thus the infamous “No Money Down” loan.

It is important, however, to realize that most of these types of loans do not pertain to investment properties unless you’re willing to pay much, much higher interest rates and fees. The simple reason for this is that investment loans of any structure carry more risk for the lender; people in a bad financial bind are more likely to pay the mortgage on their own home to avoid foreclosure than they are to pay the mortgages on their investment properties. Lenders pass on the costs of these risks to borrowers in the form of higher rates and justify it with the aforementioned scenario.

Lenders often offer what are referred to as 80/20 loans in addition to many other similar products. 80/20 loans are actually split up into two separate loans; the 80 refer to the primary (or first) mortgage and the 20 refer to the secondary mortgage, often called an equity loan or equity line of credit. This loan structure avoids the need for Private Mortgage Insurance without the borrower needing to put any money down. PMI should be avoided if at all possible since it is a monthly payment, which does not lower the principal balance whatsoever. Remember, however, that there are other costs associated with closing a mortgage loan whether it is an investment purchase or the purchase of a primary residence. Closing costs can sometimes also be rolled into the loan, but this immediately creates a situation where the borrower has negative equity in the home. That’s not a good situation to start with when dealing with home ownership.

There are many reasons why borrowers might want to purchase a home with no money down. Some borrowers are just starting out and have a hard time scraping together the funds needed for a respectable down payment, while others would prefer to put the money towards the new home in the form of home improvements and such. Borrowers looking to purchase investment properties are often unable to consistently shell out 20% for each and every property they purchase, and some investment property buyers subscribe to the belief that they should never use their own money when making a business purchase. In fact, the whole “purchase a home with no money down, fix it up, and then sell it for a handsome profit” idea is quite popular among infomercial viewers and entrepreneurs alike. It’s an interesting concept, and one that in theory should yield great profits if done correctly, but real estate investing is not a perfect science and there are many wrenches that can be thrown into the works. No money down, after all, means that a person is walking away from the purchase with virtually no equity in the home. In the unlikely event that home values begin to depreciate there is a good chance the borrower will owe more than the home is worth very quickly.
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There are some situations where no money down does not necessarily result in a higher interest rate, such as with VA guaranteed loans. It is always best to make an attempt at putting down some sort of down payment, and remember that sellers are more likely to take an offer seriously if it is accompanied by what is called “earnest money.” This is a sum of money, which acts as a sort of preliminary down payment and tells the seller that the buyer is committed to the purchase.

Take this into consideration along with closing costs, and it is highly unlikely that a person can waltz into a home-buying situation and put absolutely no money down. It can be done, of course, but this sort of practice brings with it great risk and the possibility of higher fees and interest rates. Even a small down payment is better than no down payment at all.

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