Qualifying for a loan with other people's money as a down payment

[George Pickett]

My Situation:

I'm looking to get into my first deal within the next few months. Before becoming a software engineer, I racked up $25,000 in credit card debt (moving to San Francisco without a job) and I've paid it off aggressively over the course of the last year and a half. With a strong income, I've been able to save about $2500/month for the last 6 months..

I just paid off the last of my credit card debt and I'm excited that I'll be building up savings over the coming months. A good friend of mine has done 2 deals in the last year and he's looking something multi-family (out of state for me) and wants to partner with me. If we buy a $125,000 property, and put 20% down ($25,000) we'd each pay $12,500. At my current rate of savings, it'll take me 5 months to save that up. (more likely 6-7 months once I include inspection, closing costs, etc...)

My dad is excited for me to start investing and said that if I find a deal before I have money for the down payment, he'd lend it to me with very favorable terms.

From what I've learned, it's advantageous to get the ball rolling on getting pre-approved for a loan before moving forward and putting properties under contract. Failing to secure financing seems to be a common problem for newbies. So this week I set out to do just that.

I found a mortgage broker, gathered all my tax/income docs and submitted everything. Today we had a phone call because I had tons of questions. Well, he sure answered them, and now I have a lot more.

I told him my plan and here's what I learned:

When you send in your documents, it's required that you send in your bank statements for the last two months. If you don't have the money for the down payment in your bank account, they (traditional lenders) can't really work with you. If they see that someone else wired you money (as a loan) they don't want that. To them, you're too leveraged/likely to default.

The mortgage lender gave me advice. He told me that if I didn't have the money for a down payment and I wanted to borrow from a private lender (my dad), then I'd need to get that money wired to my account, wait 2 months, then send in bank statements where that transaction isn't included. He told me that for him it's a "don't ask, don't tell kind of thing". Seems a little shady, but whatever ya need to do I guess?

After I realized that this guy probably wasn't going to be able to pre-approve me for a loan (since I sent them bank statements of my nearly empty bank account) I just fired a bunch more questions at him. He was incredibly nice and gave a wealth of information.

I told him that I have a partner who wants to go in on a deal with me and that we're going to form an LLC. I asked him hypothetically if I went in with a partner and the property cost around $400,000, (which means I'd have to come up with $80,000 for a 20% down payment) how would that work?

He told me that they won't give a loan to an LLC. They want you personally responsible for paying back the loan. According to him,

So my question to BP:

What's the best route for me to go if I want to go in on a deal with a partner, where I get the money for my down payment through a private lender? Here's what I think the answers will be, but I hope there are other options:

1. Have my private lender (dad) and my business partner wire me money now, wait two months, apply to get pre-qualified once those transactions are off my recent bank statements. (Get traditional financing, 20% down at about 4ish%).

2. Get a hard money lender who won't care that I have a business partner and that I'm borrowing money from my dad. (40% down at about 7-12%) (totally guessing here)

3. The answer I don't want to hear: save up the full amount for a down payment in cash and wait another year or so to get into the real estate game

[Melvin List]

@George Pickett the funds are considered seasoned after 60 days and you can't do a gift on a conventional investment property. Try a broker that is approved with lenders that will lend to an LLC. You will be looking more like 25% down payment if you put the property in an LLC