How to finance your down payment

Question

So.  I went into the mortgage lender at PNC today to just pick their brain about getting pre-qualified for loans towards investment properties.

Sweet lady, but hard to follow. From what I have in my notes. It appears as if the down payment for a conventional, 30 yr loan, has to come from personal finances (Money in the bank with proof of earning). I tried asking for loopholes (investor cash) but she stated that the money had to be generated through your personal income with a typical 2 year history.

But she did say, I could apply For a business loan and structure an LLC to get around having to pay that down payment out of pocket and use investor cash.

Am I asking the wrong people? Or is this correct?

Any creative ideas would be appreciated.

Chris Mason · Answer

So you've learned that you can't swipe a credit card for the down payment, or something that amounts to the same.

And you already know that people use HELOCs for down payments on rental properties all the time.

What's the difference?

Well, I'll quote FannieMae.com directly here:

"Borrowed funds secured by an asset are an acceptable source of funds for the down payment, closing costs, and reserves, since borrowed funds secured by an asset represent a return of equity.

Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, or financial assets, such as savings accounts, certificates of deposit, stocks, bonds, and 401(k) accounts."

End of quote, I added the bold. Do you see how the HELOC or 401k loan would seem to be covered, but a personal loan from your buddy Jimmy, or a credit card, would not?

I have never tried to be such a smart alec so as to draw a smiley face on a napkin, call it "artwork," and have someone borrow funds with the napkin as collateral, even though the guideline literally cites "artwork" as something you can do this with (give me a call if you own a Picaso, and we'll give it a shot :P ). You can use this, but don't try to be stupid or silly with it.

Pragmatically, what you will want to do is get official with this loan from your buddy. Hire a lawyer. The borrowed money is a mortgage. With an interest rate. It's notarized. It's recorded at the county. Secured by your primary residence, or some other property besides what you are buying. Now it's no different than a HELOC or 401k loan, as far as that FNMA guideline is concerned, if there's one thing and one thing only that a mortgage underwriter understands, it's a mortgage. DTI still needs to work with the minimum monthly payment, of course, and a way to do that is with interest only payments and a low interest rate, made up for by you offering more in upfront one-time points/fees to your buddy (one-time points/fees, that have been already paid, and that are not to recur according to the written agreement, are not part of DTI).

Not all banks or loan officers will be able to help you with this. Hint at it, dance around it a bit, and see who finishes the thought with "Aha! I know what we can do Mr. Davis!" That's your gal or guy. You don't necessarily want to be someone's live beta test of something they, or their bank, has never done before... if it's the first time that underwriting team has referenced the above guideline, it's a total crap shoot how they will interpret it. I know of a bank that, in spite of the above, somehow interprets it such that they will not let ANYONE use a 401k loan, no matter what, even though that guideline is crystal clear (to me, at least) that you can (solution: I simply don't broker the loan to that bank if that's the scenario we are working with, and I'm not even going to waste time with them if we're doing something along the lines of what is being discussed in this thread).

Chris Mason · Answer

To be perfectly honest, trying to use artwork as collateral is going to be a on-off, can't really systematize something as wonky as that.

If you wanted me to run it past an underwriter, I'm sure they would want a recent appraisal, done by an appraiser licensed by whatever certifying body licenses artwork appraisers. They would also want unsigned draft loan documents for the hypothetical loan secured by artwork. And then the underwriter is going to go "um, manager, we got another Chris Mason special here..." and there would be a big meeting where they would make fun of me, reasonable chance they would even come across this very thread, I'll give it a coin toss on a final "yes" or "no." I wouldn't be shocked if they wanted to order another appraisal on their own. And then at the end of it I'd go brag to all my LO buddies that we pulled it off. But this is all an educated guess.... mortgage underwriters really don't understand the art world, heck neither do I, and I'm married to an artist.

Would it be more or less work to simply have the funds in your account for two full bank statement cycles (at which time no one questions where the funds came from)? Probably less.

Christine Smith · Answer

@Chris Mason, thanks for your detailed reply to this post.

Do you mind elaborating a bit more about how someone might use contemporary artwork as collateral for an investment property purchase? Or which type of financial professional I should be seeking in my area to get further details about this (I'm in SoCal).

Also, as to @Brennan Davis OP about the LLC, is it theoretically possible to setup an LLC around a collection of artwork, then to get a business loan to cover a downpayment on an investment property? If yes, then how would the balance be carried?

Thanks in advance for any info.

Christine Smith · Answer

I'm asking very similar questions right now, Brennan! Thank you for posting and for articulating so well. I'm curious, do you mind on expanding on the above (LLC) option? I don't quite understand how a business loan + LLC would get around having the downpayment?

Does it mean you'd use a business loan to cover the down, but then who's covering the balance? All private investor? If not, who is approving  a loan to the LLC?

I'm still catching up on all the options, lingo, and strategies, so thanks in advance for any clarity you're willing to provide.

Scot Howat · Answer

FYI you typically can't get gift funds on an investment property.  You should house hack, while you can.  It's a good strategy towards your 1st deal.

Or, get a partner that has the money.

Chris Teti · Answer

In my experience there are ways to access business lines of credit and use them in conjunction with a commercial construction loan or hard money lender. I think it all depends on the lender.

Nicholas L. · Answer

@Brennan Davis you can also use gift money from family for a down payment.  Banks typically want a gift letter in your file from the giver, affirming that the funds are indeed a gift and are not a loan with the expectation of repayment.

If you house hack, you're combining buying an "investment property" with the possibility of low-down-payment financing available only to owner occupants, perhaps through FHA.

Joe Villeneuve · Answer

Yes.  The more you understand about How Money Works, how to move it, how to use it rather than spend it, the easier it gets.

Brennan Davis · Answer

@Chris Mason

Chris, I LOVE the creativity in this response. I understand exactly what you are saying and that is definitely someone in my situation (With nothing but a beat up car, good credit score, and handful of investors) can use as a loop hole to afford such a  down payment right out of college.

Brennan Davis · Answer

@Joe Villeneuve

Thank you for the clarification, Joe. I Assumed they knew what they were talking about.

My only thing is, if that is the case: I think it’s time to get a little more creative rather than wait 6-12 months to have a sizeable down payment.

How to finance your down payment

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