Downpayment Financing: Unsecured Line of Credit & 401k Loan

[Steven E.]

Hello,

I am looking to buy my first property and employ a buy-and-hold strategy whereby I'll rent a single-family home to tenants (cash flow positive). I am looking at homes in the $70k-$90k range in Raleigh, NC and surrounding suburbs (this price range optimistically gets a 2-3br 1-2ba home).

In order to finance the 20% downpayment and closing costs, I figure I'll need $20-$25k up front. My thoughts were:

1) $10k from a personal line of credit - I opened a line of credit, unsecured, and i included the monthly cost of servicing the debt in my cash flow analysis to be sure the property would eventually pay off the $10k I owed. I am a young professional with a good job, so the $10k LOC was almost instantly approved. The interest rate works out to be ~10% APR.

2) $10k from a loan from my 401k - my 401k plan allows me to take out a 5 year loan for up to half of my total balance. I would repay the loan over 5 years in semi-monthly installments, at a ~4% interest rate (however, all the interest is paid back into my account, so I'm technically not "paying" interest... It's more of just a liquidity squeeze)

3) $5k from personal savings

After speaking with a few mortgage lenders, I was told that the unsecured line of credit would not be allowed to be used to fund the downpayment. I was curious about a few questions:

1) Has anyone else used an unsecured line of credit to borrow money to make a downpayment?

2) Has anyone else successfully taken a "loan" against their 401k plan to be paid back over a longer period of time?

3) Any other thoughts?

I've put together some financial models and based on mortgage prices / rent I could get from tenants, I could service my 401k loan and the line of credit payments and still be cash flow positive (or neutral but building equity in the home).

Thanks,

Steve

[Jesse Gonzalez]

An answer to your 401K question straight from the fannie mae selling guide is as follows,

Borrowed Funds Secured by an Asset

Borrowed funds secured by an asset are an acceptable source of funds for the down payment, closing costs, and reserves, since borrowed funds secured by an asset represent a return of equity. Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, or financial assets, such as savings accounts, certificates of deposit, stocks, bonds, and 401(k) accounts.