Can't use a private money loan for down payment

[Michael Campbell]

I've tried several times to get a loan for an investment property and each loan officer is telling me I can't use private money for the down payment.  How else am I supposed to come up with a down payment?  I don't understand why I can't use a private lender. 

[Alex Breshears]

Hi Michael! I agree with others where the lender wants you to have skin in the game, and also avoid having 100% LTV on a property. Also, right now you are likely experiencing the tightening of underwriting. Lenders are being a lot more cautious on what they fund, including limiting the types of properties, the business plan for those properties, and the reserves they want a borrower to have. It is even affecting the experience they want from a borrower. Some of these lenders may have allowed a private loan to do the 20% down, but now they want everything as safe as it can be.

From a borrower's perspective - while 100% LTV sounds amazing - in the current economic cycle it could actually be a detriment. What happens if you NEED to sell this property and the value is less than the amount owed? That means you are coming to closing with dollars just to get rid of it! Also - what happens if you need to refinance this loan? There's no lender right now that will allow such a high LTV on investment property in a single loan. Doing 100% actually traps you into the property and the loan, with the only way out meaning foreclosure or deed in lieu of foreclosure. As a real estate investor that needs access to leverage - neither one of those options showing up on your credit report is going to help you. Also - having leverage that high could mean that the property doesn't cash flow much - if at all. Since the 1st mortgage has no say in what the payment would be for the 2nd mortgage (the private loan), they can't really factor in the new debt payment into your DTI matrix or even for a DSCR loan calculation. The fastest way to foreclosure is giving someone with little to no liquid assets a loan on a property that negative cashflows, even under the best of circumstances (aka 100% occupied). The banks/lenders DO NOT want to own real estate right now. In order to avoid that - they are going to lend in situations they deem to be the least likely to default.

I hope that helps!