Borrowed Funds for Down Payment...

[Jason Miller]

There seem to be hundreds of creative ways to get into an investment property, but I have a question for lenders about using mostly borrowed money for the down payment.  Is this really possible?  Let's say I've only got 5% cash, I borrow 25% for a total down payment of 30%, is that going to fly even if my borrowed money was off the books or my private lender didn't want a 2nd position mortgage?

I'm asking because I wouldn't want to bring down payment money to the table in bad faith if a lender is truly expecting that all funds that I bring to not be committed or due anybody.

I've read that lenders don't want the borrower to be over-leveraged and have skin in the game, I get that.  I just want to be realistic about my expectations as I raise capital for my investments.

[Chris Mason]

We allow borrowed funds to be used for down payment and cash to close on an investment property, provided that it is secured debt and typically debt secured by something other than the subject property.

So we'd allow a HELOC secured by your primary residence or a private 2nd mortgage on another investment property (or a combination of both) for your down payment. Debt secured by financial assets, such as a 401k loan, are also OK. In theory even artwork works, but don't try to get all creative with a smiley face you drew in watercolor paint securing $75k in debt.

What we will not allow is unsecured debt to be the down payment or closing costs because, historically when that was allowed, some huge percentage of the time that "unsecured" debt was recorded as a 2nd mortgage on the subject property the day after closing, thus entirely defeating the purpose of "skin in the game."