Realtor · Minoa, NY · Member since 2015 · 125 posts · 56 votes
Hi all,
I'm being told that if I am going to take on private money that it's best to have it in my account three months before starting the prequalification process to avoid the "no gift money for an investment property" rule. This seems like an absurdly long time and I'm wondering how people get around this. Do you front the money from your own funds in some creative way and then pay yourselves back when the private money comes in? Is there an exception to the rule that my mortgage originator isn't telling me about?
Background info: I'm looking to pick up my third house and in this market I would be buying in the 30-80K range. I have some cash reserves and a line of credit that I could leverage if necessary but not enough to get 20% down plus closing costs on a house in the upper end of that range.
If you're getting a conventional (or similar) loan, and they require 20% down, then you need to disclose if you have borrowed some of that money. The three months trick is because they typically want two or three month's bank statements. If money suddenly appears in your account and that's the down payment, you will have to explain where it came from. If its a loan, they may not approve your new first mortgage. If the money's there at the start of the period they're looking at, then they usually don't look any deeper.
The proper way to do this is two have two loans - a first from your conventional lender and a second from your private lender. And disclose the second to the first. Lenders will often have a form asking if any of the down payment is borrowed.
When buying a primary, lenders will allow someone to gift you the money for the down payment. But they will often have to write a letter stating the money is a gift, not a loan. If it truly is a loan (that is, you have an undisclosed side agreement), then you are truly committing loan fraud. I don't think lenders will even allow this for investments. They want your money for the down payment.
If you're getting a conventional (or similar) loan, and they require 20% down, then you need to disclose if you have borrowed some of that money. The three months trick is because they typically want two or three month's bank statements. If money suddenly appears in your account and that's the down payment, you will have to explain where it came from. If its a loan, they may not approve your new first mortgage. If the money's there at the start of the period they're looking at, then they usually don't look any deeper.
The proper way to do this is two have two loans - a first from your conventional lender and a second from your private lender. And disclose the second to the first. Lenders will often have a form asking if any of the down payment is borrowed.
When buying a primary, lenders will allow someone to gift you the money for the down payment. But they will often have to write a letter stating the money is a gift, not a loan. If it truly is a loan (that is, you have an undisclosed side agreement), then you are truly committing loan fraud. I don't think lenders will even allow this for investments. They want your money for the down payment.
Do you have enough equity in your other properties to secure a private lender in the amount you need to complete the new purchase? If so, you could borrow against the other properties, use that cash (and your reserves and line of credit) to pay for the new purchase, then refinance the new property. Run the scenario past your mortgage broker to make sure you would qualify for the refi and to estimate how long it might take for the refi. Some banks will require seasoning before they will do the refi; however, if you are upgrading the new property you may be able to use a higher ARV. If the new property is rented for a while you may be able to count some of the rent as income.
Right. Obviously I have no desire or intention to commit fraud. I want things to be clear and certainly legal. What I hear everyone saying is that you typically make an agreement with a private lender (friends and family style is my plan in this early stage) and then bring that agreement into the conversation with the mortgage broker.
A sub-question is how do you make the agreement with the friend/family member a legal agreement. I've heard some things about how we can't make loans with interest as individuals without ruffling SEC feathers. Do I need to enter into a legal partnership? Offer shares in the LLC?
Just wondering why a conventional lender is involved when you already have private money. If that's not enough to acquire the property, recruit more private money and go in as an "all cash" buyer (the seller won't care!).
...or, why not Joint Venture with your private money source instead of borrowing from them?