Using Private Loans as a Down Payment

[Brice Aldrich]

Hello, I am interested in raising capital to purchase multi family homes. To do this I was going to ask my family if they would be willing to loan privately at a competitive interest rate. I intend to use the private loan(s) as a downpayment.

Typically when applying for a mortgage banks will ask if the funds for the down payment were borrowed or gifted. To my understanding most banks will not loan if the downpayment is borrowed, and if the money is gifted there are stipulations.

My questions for you are:

1. Is it true banks will not loan on a borrowed down payment?
2. If the above is true, couldn't I just say the money is gifted?
3. If I say the money is gifted how does that protect the private loan(s) relationship(s) between my family and I?
4. What are the stipulations of a gifted down payment?

Thanks in advance for any help/advise!

[Michael Seeker]

@Brice Aldrich, below are answers to your questions:

1. Is it true banks will not loan on a borrowed down payment?  This is generally correct.  Depends on the lender and LTV and a number of factors, but as a rule of thumb you can assume a bank will not loan to you when the down payment is borrowed.
2. If the above is true, couldn't I just say the money is gifted? In my experience, banks will allow you to be gifted up to $10K.  This was 5+ years ago so the amount may be different today.  There are also possible tax consequences involved with gifting.
3. If I say the money is gifted how does that protect the private loan(s) relationship(s) between my family and I?  It does not.  If somebody "gifts" you money, the bank will require a signed document indicating the money is a gift and there is no liability to repay.  You may attempt to maintain some arrangement separately, but the private lender(s) would not have any real recourse if you stiff them.  I would not get involved in this situation as a private lender, even with my own family.
4. What are the stipulations of a gifted down payment? See #2

What you are trying to do is basically avoiding any of your own skin in the game.  Banks don't like that.  An alternative would be to partner with somebody who has the financial standing to qualify for the loan, however they would also be required to guarantee it and it would be much more difficult to unwind if you want to eventually have 100% ownership.

[Bryan O.]

Hi @Brice Aldrich. You will want to talk to a commercial lender. Typically, you are going to be buying in an entity. With multifamily, it is almost a guarantee that the funds are not all yours. Go find a few commercial lenders and see what it is they look for. You may be just fine. With a residential mortgage, all of those points are correct, so I am guessing that you spoke with the wrong type of lender.