I'd like my first deal to be a buy-and-hold property. I'd considered using the BRRR strategy (buy, rehab, rent, cash-out refinance to 30-year fixed) with a portfolio lender, or have more recently been researching the HomeStyle product from Fannie Mae that rolls rehab costs of up to 50% ARV into a conventional mortgage. My question applies to both scenarios.
I'd hoped to use a private lender (my parents) for the down payment and closing costs. But I recently learned that Fannie Mae doesn't allow "gifts" to be used for down payment, closing costs, etc, on an investment property. Likewise, I've heard portfolio lenders frown upon this.
So what qualifies as a gift? I fully expect to have a legally binding contract with my parents that obligates me to repay the loan in full, with specific terms. Does that count as a gift with Fannie Mae? Would a portfolio lender generally allow a private lender to provide down payment and closing costs on one of their loans? Does it matter that the private lender is my parents?
Thanks, much appreciated. Link to Fannie's "gifts" page linked below.
- Gift is money that is not required to be repaid. It's only allowed on owner-occupied and second homes with certain caveats about who the gift may come from and what, if any, the borrower is required to also put down. It is not allowed on investment properties. Likewise, you cannot get a second mortgage - from private, public or family sources - as the down payment to purchase an investment property.
Originally posted by @Ryan Gillette :
- Gift is money that is not required to be repaid. Likewise, you cannot get a second mortgage as the down payment to purchase an investment property.
So if I'm understanding you correctly, if I have a private lender contract with my parents that obligates me to repay the debt, that would NOT count as a gift?
Also, not sure what you mean by "you cannot get a second mortgage as the down payment to purchase an investment property". Can you explain that a little more?
Gift is when it is not to be repaid. A loan, secured or unsecured, is a loan. Neither are acceptable sources of down payment on an investment property purchase.
For owner-occupied loans, gifts and second (and sometimes third) mortgages are allowed. Take a basic 80/10/10 on a $100,000 house. You borrow $80,000 from your first mortgage lender, $10,000 from your second mortgage lender, and put $10,000 of your own funds. Sometimes this latter $10,000 is gift funds provided it is from family and is not expected to be repaid. None of this is applicable to investment property purchases because of the additional risk factors present in investment properties - particularly the borrower's incentive to repay and the higher risk of fraud in the transaction.