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Deal or No Deal – Can we still purchase “No Money Down?”

10/07/2010

At the turn of the century, lending was booming as house prices soared and property investment was seen as a “no brainer” for many as investors could be seen to “do no wrong”

In terms of obtaining a Buy-to-let (BTL) mortgage, things were pretty simple as affordability could be self-certified and there were few checks on the borrower or the property to be borrowed against.

Lots of deals were struck, many openly advertised by the various property clubs and portfolio builders that sprung up at the time, all advising us how we could be paper millionaires in a few short months and without spending any, or just a little at least of our own money.

As a result, No Money Down (NMD) investing became extremely popular and many investors without substantial cash reserves or other securities built substantial portfolios in a relatively short period of time.

After the heady heights of 2006 when investors could do no wrong came the global economic downturn, the property crash, the credit crunch. Almost overnight 1,000’s of properties were no longer worth as much as the owner thought they were or, more alarmingly less than what they bought for them…the dreaded, Negative Equity.

Not surprisingly, investors who were highly leveraged found that they also couldn’t meet their mortgage payments as many tenant’s couldn’t or wouldn’t pay the rental demands that were being made.

Unable to afford to subsidise the monthly shortfall in rent to cover the mortgage and other costs, unable to remortgage elsewhere because they didn’t have enough or any  equity in the property, and unable to sell without making a loss, possibly substantial by not recovering the amount that was paid often borrowed at 100% of the original value (or more)

This downward spiral caused 1,000’s of BTL properties to be re-possessed and the lenders were in crisis, something needed to be done.

New borrowing restrictions enforced

As a result of these problems and lack of available finance, lenders changed the rules and made borrowing far more restrictive.

Some of the changes included:

  • New CML (Council of Mortgage Lenders) incentive disclosure form
  • No same day bridge and remortgage facility (aka Mortgage Express)
  • A much higher loan to value (LTV) at least 80% and typically 125% rental coverage on mortgage payments.
  • New borrowing rules for deposits (eg. Secured borrowing is fine, unsecured is not allowed)
  • Disclosure of source of deposits
  • And many more

So where does that leave NMD purchases?

It means that many of the techniques and approaches used in the period 2000-2007 are no longer legal or not available. This is either because of new legislation, new rules from mortgage companies or restrictions on lending.

However, when a technique so valuable to investors as NMD financing is under threat then new options usually spring up, as has been the case in the last 12 months Lease Options being the current “new big thing”

There are clearly opportunities that have arisen out of recent events, many properties are available at discounted prices from motivated or distressed sellers.

Where there are restrictions or legislation exists, the challenge for investors and funders is to find the ‘grey areas’ where the interpretation of the current regulations is open to doubt. In this space investors will need to decide if the benefits of participation outweigh the potential drawback of the transaction failing if the lender disagrees with the specific process being used.

There are various companies in the market place who claim to be able to provide NMD or low money down (LMD) deals, the web is full of them.

They claim to take great care to stay compliant with current guidelines and only offer property deals where that comply with all current regulations and guidelines.

Words of warning

We at Walker Fox have some important advice for those investors who are tempted to avoid the traditional investment (using cash to fund a deposit) and are tempted to go for one of the many NMD/LMD deals being sold

Now there is emphasis on the word sold for a reason. People are being “sold” the opportunity to acquire property using little or none of their own money and then being “guided” along a financial path with regards to obtaining a mortgage.

The borrower is obliged to disclose all material facts in relation to the mortgage, this in a nutshell means:-

  • The purchase price of the property
  • The source of the deposit
  • Any other relevant information.

Also note that it’s the borrower referred to, not the sourcing company/finder/portfolio builder, the borrower. If the material facts are not disclosed, the borrower is committing fraud, simple!

Therefore, we suggest that for any deal offered that the potential purchaser (borrower) go back to the broker/finder and say “is it ok if I call the lender and just confirm this is all compliant and in order” Of  course, the correct answer should be a confident “yes” but you just try it.

Disclaimer

The author is not regulated by the Financial Services Authority or any other body to give financial advice and the information herein is an expression of opinion by the author. The author recommends that you seek independent legal and/or financial advice before entering into any agreement in relation to property investment. This article assumes that you have the correct and adequate funding in place for your acquisition. We are able to make referrals to an IFA for further information on financial products related to property purchase.

compliant and in order” Of  course, the correct answer should be a confident “yes” but you just try it.

About Walker Fox

Walker Fox Land & Property Ltd act as professional property sourcers working with investors to add to their property portfolio in Wakefield & the Five Towns (Pontefract, Castleford, Normanton, Knottingley & Featherstone)

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