Can a seller "fund" your downpayment for an investment property?

Question

Let's say the property sale price is 290k. Can we increase the price to 385k, and have the seller gift the 25% down payment? Or possibly loan it? For a regular fannie mae investment property loan on a 2-4 unit.

Alex Breshears · Answer

@Ellie Narie - I love how you are thinking creatively about this situation!  I wanted to just clarify a few things to hopefully guide you towards your first investment purchase!  First, the increase in sales price would only work if the property would appraise for that amount, and the reason I bring that up is it can be pretty common with first time home buyers asking for closing costs to be paid by the seller. Usually the offer will be bumped up according to how much of the closing cost burden a buyer is asking the seller to cover, but it is also under the assumption the property will appraise for that contract amount.  There is the possibility to waive an appraisal amount, which means you would be responsible for 100% of the amount between the appraised value and the contract purchase price.  This exemption was waived a lot in the craziness of the past 18 months in the very strong sellers market, so I like to let newer investors know what they are signing up for if they elected to waive that stipulation.

In all cases, the lender will not count the downpayment as coming from increased equity. In the eyes of a lender they want to see you have "skin in the game", and also that they are not overleveraging themselves or their borrower (you) in the deal.  For example, if you got a 20% downpayment loan, but it was a really high interest rate to purchase an investment property with an 80% 1st mortgage, that could put you in jeopardy as a borrower because the two payments combined might be larger than what you could rent the property for.  This makes the situation a lose-lose for both you and the lender.  By having that 20% down payment in the deal, the lenders feel like you have more to lose if you walked away from the property, but also they know what your monthly burden would be on a mortgage payment for that property.

There are some cases where a lender may accept what is called a seller holdback. That is where the seller is willing to take on the debt of that second mortgage (lenders that allow this are always going to require the lender be in 1st position and the seller in 2nd position).  In your example, if the seller was willing to carry a 2nd mortgage for 20% down, then that $58,000 would show up on title as a 2nd mortgage to you with the seller as the lender, and then your 1st mortgage for the other 80% down would be the company you chose for your mortgage.  Again, the lenders that allow this are far and few between, and I am not sure any would allow up to 100% combined loan to value in the current economic cycle we are in.  But I wanted to showcase a scenario where this could be possible.  This is not likely going to be conventional Fannie/Freddie debt, but some smaller regional lender, or a DSCR lender may have these types of programs.

If the 20% downpayment is the sticking point for investing, I can also advocate to look for ways around this. Would buying a rental make sense for you as an investor? Does it fit into your lifestyle and your goals? There are a ton of ways to invest in real estate without buying a rental. I personally will never own another long term rental because it doesn't fit my goals or my lifestyle, and certainly doesn't fit my skill set.  I just advocate taking literal pen to paper, ask yourself WHY you are investing in real estate, and try to come up with something greater than " I want financial freedom". Everyone wants that. But why? Do you want to spend more time with family? Do you want or need geographical freedom? Do you want time freedom? Generally when people dig into their why, they see exactly what they are doing this for. I bring this up now because as a beginner you have a golden opportunity to start your investing journey off on the right foot.  You can explore different options, see what works with your personality and skill set, and then pursue that with passion!  So don't try to fight and put a square peg in a round hole, find a way that works for you. And you don't have to stick to just one way either!  AGain I bring it up now because most people don't consider the time it takes to do the thing they say they want. Owning 20 single family homes as rentals sounds amazing, until you have 20 mortgage payments, 20 families, a few AC's give out within the same month, property managers, payments to track,  taxes to file potentially in different states if your rental property is spread out. I will ask that you consider what you want to spend your time doing, because it is very easy to end up working yourself into another full time job in real estate, and if that's not what you are after, then don't go there in the first place. I personally invest passively so I can live actively, so all the stuff with long term rentals never suited me.

Sergey A. Petrov · Answer

You’ll have a very hard time finding a lender willing to do that. If the list price reduced and the property hasn’t sold, it is / was likely overpriced to begin with and the appraisal will reflect that.

Sergey A. Petrov · Answer

You’ll have a hard time finding a lender willing to do that in today’s environment. Plus if you artificially increase the purchase price it won’t appraise and you are back to square one

Jay Voorhees · Answer

Hi Ellie - This is not possible for an agency (Fannie/Freddie) loan. You would likely need to work with a private lender. Gifts are not acceptable for investment purchases (and from interested parties at all) and a loan would not work bc your required CLTV (combined loan to value ratio) still needs to be 75% or less. This would keep you at 100% CLTV.

Caroline Gerardo · Answer

Lender is not going to allow 100% financing. Increasing the price by 28% appraise. There is no way to hide the not having a down payment and it would be fraud to hide the facts.

Ellie Narie · Answer

The property has been listed for that much, but it went down in price. If I can get a high appraisal, would lenders allow such a deal?

Can a seller "fund" your downpayment for an investment property?

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