1st time buyer trying to finance, having issues with down payment. Any advice?

General Real Estate Investing
1

Hello All,

Iv been looking buying my 1st property, I have been looking at a few 3-4 unit properties in the $100,000-$150,000 range. My credit and income both check out for financing, I have $14,000 cash for a down payment. The bank wants 20-25% down for an investment property. Are there ways around this?

I cant do an FHA because the property is 3 hours away from work so I wont be living in it. I cant get the money as a gift because they will hold the large deposits or wont let me use them. They consider large deposits to be 25% or greater then my monthly income not deposited by work.

My fiancee’s mother wants to help us out with this but we cant use the money. Do I see if she wants her name on the mortgage also? Is there a way to not have to put 20-25% down? We dont owen property, we :helprent.

Any good advice?

Thank you much

Josh

2

I would first locate a mortgage broker.

They know how to package loans, and they know which lenders will lend with borrowed down payments, etc.

Here’s some ideas that may, or may not, work with any particular lender…

  1. Have the seller carry all/part of the balance of the down payment against the property you’re buying (as a second mortgage note).

  2. Have the seller carry all/part of the balance of the down payment secured against another property (yours or someone elses).

  3. Have the seller carry all/part of the balance of the down payment secured against personal property you own (boats, cars, man-toys, RV’s, trailers, cabins, etc.)

  4. Have the seller carry all/part of the balance of the down payment secured by “nothing,” as in an “unsecured note.”

***Unsecured notes are very powerful for a lender, because if you default, the lender can sue YOU personally for everything you own, because EVERYTHING you own effectively becomes security for the note …including the property you’re buying from him…

So, “unsecured” actually means EVERYTHING you own becomes security.

If you don’t pay, and the lender gets a judgment, your only recourse ‘is’ to pay, negotiate a settlement (hopefully before the lender takes you to court) or file bankruptcy.

A ‘secured’ loan then is secured ONLY by a specific piece of property, and the lender is screwed seven ways from Sunday, if there’s not enough equity left to satisfy the value/balance of the note.

That’s why most borrowers prefer ‘secured’ notes, so the lenders can’t go against everything they own, if they can’t perform.

Notwithstanding, in your case, an unsecured note for the balance of your down payment, might be just the ticket for qualifying for the loan.

THEN (after you’ve closed on the transaction) …you could invite the seller/lender to secure his now-unsecured note, to your property, as “sole security” for the balance of the note. That is, move his unsecured note to your property, as a second mortgage (2nd Trust Deed).

Some banks will make you promise NOT to further encumber the property, or take out a second mortgage (this mostly applies to non-owner occupied real estate), after closing, for a period of time, or the entire term of the loan, etc.

Otherwise, those are the two basic ways of creatively coming up with a down payment.

You might consider getting a smaller LTV, such as 70%. Lots of lenders are “happy” loaning 70% with much more leeway in the qualifying.

That’s why it’s best to talk with a loan broker and pick his brain, until it bleeds. Don’t be shy about talking about creative ways to get financing.

If the broker doesn’t know of any “ways,” or looks insecure and squeamish about unconventional financing techniques, you’re in front of the wrong mortgage broker. Just saying.

Good luck.

There’s portfolio lending, too, with more generous qualifying requirements. These are bank-owned loans, they’re not selling to the government.
:beer

3

Javipa,

Awesome! Thanks for all the different advice.

Getting a smaller LTV (loan to value), such as 70%? What do you mean by that? How would that work?
I will start looking for a Broker. What do you think about her mom being on the loan for the other part of the down? Maybe as an equity partner. I will look into protfolio lending also.

Josh

4

A 70% LTV loan just means you’re securing a loan that is much easier to qualify for, because the bank is in a safer equity position.

The bank has a 30% equity cushion, to insulate itself financially, in the event you default.

For example, if you can get the seller to carry 20% of the sale price, and you put up 10%, you only need to finance 70% to buy the property. At 70% LTV, some banks ignore where you’re getting, or how you’re structuring, your down payment.

***Another option, that requires some time, but works, is to take title ‘subject to’ and then seek to refinance the property.

Likely you can refinance 70/80/90% without putting anything more down. The bank just loans based on the current value, with no regard for your down payment …because YOU already OWN the property.

Usually some seasoning has to occur, before any lender wants to consider refinancing an existing note. 3 to 12 months, give or take is not unusual.

***Your future mother-in-law could definitely be an equity/credit partner with you.

However, you’re giving up quite a bit, for the use of her cash.

You would rather give her an interest rate, over an equity interest (partnership share), uh …especially in the unfortunate/fortunate event that you don’t end up marrying your mother-in-law’s daughter… Just saying.

That would represent a pretty expensive, residual, uncomfortable, ongoing partnership, with your ex’s mother… No thanks.

I would rather owe my ex’s mother-in-law a little interest, rather than split half my profits with my ex wench’s egg donor.

But that’s just me. :anon

5

Hi Josh, I pretty much agree with what’s been said but I would like to add my 2 cents :big grin

If you need more of a down payment, then partnering with someone else - like your family - to buy the property together makes a lot of sense. Just be sure you have the agreement written down so both parties know what they’re responsible for.

For example, in your situation, you may agree that you will do all the day to day management of the property so your partner doesn’t have to do a thing. You may agree that you will sell the property in 5 years, or when it is appraised at 25% higher than what you paid for it, or any number of other possibilities.

The other thing I wanted to mention to is that there are other ways to invest your money in real estate without becoming a landlord. Would you be interested in products like REITs or lease options?

Best of luck!
David

6

Thanks again for all the advice. I got in contact with a broker today and will be talking more on Monday. As far as having a partnership, if I go that route I will for sure sit down and talk about details and have it in writing.

I might be interested in REIT and lease options. I need to look ito them and how they work. What do you think about them?

Again, Thank you
P.s. Iv been getting very excited, but wanting to keep it cool so I do it the right way.

7

I am definitely investigating my options.

Thats terms of Hard money loans are for about 12 months at 10-18%,
does anyone know if a Personal loan could work? Terms are longer but about the same intrest rate.
How could it effect my ability to secure financing if I was to take out a loan for around 10-12k?

8

Securing a personal loan is going to affect your debt to income ratio and thus could disqualify you from you loan. Before looking into this, I would talk it over with your lender and see how it would impact your mortgage.

You could look into taking a secondary loan with the seller. You would make the payments directly to him or her and the loan amount would be counted as part of the down payment.

Here is the thing. You will need to make sure that if you are going to finance nearly 90% of the value, make sure that the property is still profitable. If you start with a negative cash flow, it may be a better idea to set more money aside to build a larger down payment and then buy a property.

9

Gift money can be used. I don’t know what you mean when you say you cannot use money from your MIL.

If the lender does not allow the cash that you plan to use for down payment to be from a gift, then the cash down payment has to come from “seasoned” funds. For some lenders “seasoning” means that the cash you intend to use for the down payment has been in your bank account for two or three consecutive bank statements.

Most lenders will ask for only two recent bank statements, but some may want the last three.
If you already have the money seasoned in your bank account before you apply for your financing, then the gift funds restrictions will not apply.

10

Need $30k to do 20% on $150. you have $14k.

Walk into closing with a paper sack with $16k cash (MIL’s money). It’s cash. You had it under the mattress. It’s not a gift. It’s not a loan. Keep your mouth shut about its source. You’ve been stashing money in a coffee can buried in the back yard for a while. Had a garage sale. Whatever.

Had a similar deal years ago when a moron wouldn’t give me immediate credit for a cashier’s check. Moron said “it’s a check - 7 day hold.” I said “wait here, I’ll be right back,” went across the street to my bank, gave them back the cashier’s check, withdrew $27,000 cash, walked back across the street and said “let’s see you effin’ put a hold on this.”

Or something like that.

11

Hahaha. I like your style. So no questions asked doing it that way? Well besides, where did it come from… “mowing lawns and recycling cans.” Then all is good?

12

Thanks for the laugh. Sometimes we just have to think outside of the box. If there is no paper trail and nothing is in the papers about a recent bank robbery - what are they going to do? Refuse to accept your money? That is very unlike a bank. LOL Just don’t deposit it and then withdraw it - to obvious of a paper trail.

13

So its pretty good option to do it this way. I like this idea. Thanks guys!

14

Another solution which I have used in my almost 400 transactions would be to find another property to buy where the seller is motivated to sell and who will finance the transaction. No underwriting, no debt to income ratios, no seeking approval. Ask for seller financing and you will be surprised to find your solution there.

I have for over 25 years of investing…even as recently as 2 months ago…found a vacant home…made an offer with seller financing…they said YES! I look for vacant homes, long distance numbers in ads…you will find real ‘don’t wanters.’ Would they rather start receiving income or keep feeding the alligator of an empty house.

They are out there…plenty of them. A lease purchase or seller financing is just another example of accomplishing the same goal to finance a house that most folks would look to a mortgage company, but there are NO qualifications.

My last deal was 5% down, NO DOC Seller Finance Loan.

Hope this helps.

Rob

15

This info sounds great Rob. Many of you guys seem to like seller financing. Where could I find some good info on seller financing? Iv done quick google searches and haven’t found much good info. Any particular book I should pick up?

What could some Seller Financing deals look like?

The properties that Iv been looking at are about $100,000-$150,000 duplex-quads

If the seller agrees to finance, how do things work from there? What should I expect?

Josh

16

Typically seller financing is going to have small down payments (usually less than 10%). The interest rate will be one or two percentage points higher than typical mortgage rates which is to offset the seller’s additional risk. Usually seller financing will also include a balloon payment after three or five years. At this time, you get a bank mortgage and use the market appreciation, property improvements and seller financing equity as a down payment towards the loan.