Down Payment Policy
This means on a $2,500,000 property we would like to see $750,000 down or on a modest $200,000 property we would like to see $60,000 down, of course more is always better. We consider the buyers proposed debt-to-equity ratio for the transaction to understand how much money is borrowed (debt) in relation to how much the Buyers have invested (equity). A high debt-to-equity ratio also indicates that the buyer could be a higher risk.
Buyer's ability to meet the payments is the most important quantifiable qualification. We want to know exactly how the Buyer intends to make the payments, and where the money comes from. We consider combined family income from employment and cash flow from the property or business. Conventional 'provability' can be augmented with reasonable potential, but the payments must be affordable. No exceptions, we will not compromise on affordability. Which is why we prefer income property with a DSCR of 1.3 or better to assure a positive cash flow after debt service.
We do realize that not everyone has the ability to make a 30% or better down payment and have made allowances for that in our policy. Down payments should be 20.75% or more with 15.75% as the recommended minimum. If the Buyer doesn't have the 15.75% recommended minimum we will consider taking what they do have as a down payment and a note for the difference to bring it to the 15.75% recommended minimum. The note payments will start immediately and must be kept within buyer affordability ratios.
Properties that can be purchased under current value can sometimes be used as a compensating factor in considering down payment qualifications, as can properties where a value can be improved. The old rule of thumb used to be 'what ever the buyer is missing, the deal needs to have' and to a certain extent that is still true.
One of the biggest factors that caused the meltdown that put the market in this mess was greed on the part of the wall street 'banksters', real estate brokers, mortgage brokers, and real estate investors. It was too easy to take an LTV parameter and make a file appear to fit the guidelines rather than the qualifications fit the guidelines. It started with the greed of the wall street 'banksters', and quickly spread to real estate brokers, mortgage brokers, and real estate investors, and even the commercial banks which typically know better got caught up in it to an extent, but we can't, which is why we look more at LTC than LTV.
Never the less we do realize that not everyone has the ability to make even a modest 15.75% down payment and have made allowances for that in our policy which has a required minimum down payment of 10% or a loan to cost maximum of 90%. That is a drop dead no exception minimum for our primary programs.
See our Down Payment Graph below for a visual idea.
The Down payment is second in importance to affordability, but both are important.We will not compromise on affordability ratios.
A down payment below our recommended minimum is possible.
If someone is sincere, has some skin in the game and a reasonably good story we'll do our best to accommodate them, it may take some compromise or extra effort but we can usually find a way.
The smaller the down payment the smaller the pool of investors we have to choose from unless the deal has what the end buyer doesn't. (equity)
There are a number of ways over a fairly short period of time to create equity in a deal where it doesn't exist, the classic 1 + 1 = 3 formula for a rehab is one example.
1 + 1 = 3 means buy it for a dollar, put a dollars worth of improvements in, have something worth three dollars when it's done.
Let's face it; one thing that hasn't changed is that any buyer who is not a glutton for punishment wants to get to a zero balance sooner rather than later, and the more down the shorter the distance to zero balance, it's not rocket science. The count down to a zero balance and a free and clear of encuberances property should be your end goal. We built our process to make it as easy as possible to accomplish that worthy end goal.
However we realize a lot has changed since the meltdown (like anyone that is still lending wants a bigger down payment) but sometimes even a measly 10% presents a challenge. It is a drop dead minimum but there are some ways to work around it.
If the Buyer doesn't have the required minimum down payment of 10% we will consider taking what they do have as a down payment and a note for the difference to bring it to the required minimum down payment of 10% which is reflected in our Loan to Cost cap of 90%. The note payments are in addition to the $15,000 equity note* payments, and they will start immediately and must be kept within buyer affordability ratios.
*With any down payment each end buyer has a $15,000 equity note amortized 15 years at the prime rate with a 5 year balloon to establish their credit with us and secure their equity for their first deal. Once a satisfactory payment history has been established in 2 to 5 years the note will be retired and the credit will be established for life.
See: $15K Equity Note for full details.
The amount of 'skin in the game' for buyers is an important part of the qualification process, and an equity partner is also an acceptable method of meeting 'skin in the game' down payment requirements.In some cases for deals that make sense we may be able to refer you to an equity partner or may even consider becoming an equity partner in some deals if it makes enough sense to us.
Doing deals is what we do, we just don't want to work on the property any more, which is what makes some deals possible.
We will not compromise on affordability ratios. Period. Everything we do is in the best interest of the deal, it's a win-win-win deal, or no deal. In situations where someone can't even make the required minimum down payment of 10% as long as they have some skin in the game and a reasonably good story we'll do our best to help accommodate them, it may take some compromise or extra effort but we can usually find a way.
If you sincerely want a property and are willing to do your part but just can't come up with the 10% minimum we can find a way as long as you have some 'skin in the game' and aren't looking for a hand out we'll do our best to extend a hand up, but if we're going to be in the boat together we all have to row.
For a PDF Copy of our ---> Down Payment Policy <--- click here
*Each end buyer has a $15,000 equity note amortized 15 years at the prime rate with a 5 year balloon to secure their equity and prompt payment on their first deal. Once a satisfactory payment history has been established in 3 to 5 years the note will be retired.
If you want to explore the possible advantages and disadvantages of available strategies for your circumstances contact your Associate to schedule a no-cost no-obligation consultation, share what you are hoping to accomplish, and why, and your Associate will help you accomplish your objectives if possible. There is no cost for assistance if you qualify, and your Realtor and attorney can still be used. Your Associate will help you find the most appropriate solution.
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