Private money "wait time" and how to get around it.

[Brian Barfoot]

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.

Thanks,

        Brian

[Jon Holdman]

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.