Using borrowed money as a down payment?

Question

Hi guys,

I was hoping someone might be able to answer this for me. I live in Vancouver BC, currently investing in Windsor, Ontario. I bought my first rental property there last year and its doing very well. Now, of course, I'm itching to try and pickup another one. I'm curious to know if i can, or how i can use borrowed money for my down payment. I already have most of the down payment but there's still probably 10-12k that I have to come up with. I'm wondering if anyone has a solid way around this?

Let me know if you guys have any ideas!

Thanks BP

Julie Toh · Answer

@Connor Kelly

Update to quidelines changes for HELOCs.

Qualifying for a HELOC may not be the slam-dunk you expect it to be, and even if it was, HELOCs aren't a guaranteed source of home equity liquidity. Accessing property wealth has, and will continue to be, an important component of later in life financial planning. There are home equity financing alternatives beyond selling your home and HELOCs.

https://business.financialpost.com/real-estate/mortgages/canadian-banks-expected-to-tighten-home-equity-access-as-aid-measures-wind-down

Daniel Kong · Answer

You usually can't for convetional loans. One tactic you can do though is borrow the money and let it just sit in your bank account. Usually its two months of bank statements and the lender wont care where it came from before that.

Scott Innocente · Answer

@Connor Kelly good to hear!  Thanks for the feedback.

Evan Polaski · Answer

@Connor Kelly, as @Daniel Kong mentioned you do need to let it sit for a bit.  I am not sure about Canadian lending, but in the US there are occasionally forms the lender wants you to sign stating that you are not borrowing your downpayment.  Granted, I had a recent deposit on one of my purchases that was a small inheritance, so I had to state that, which may have been what prompted the form.

But, there is nothing illegal about it in general.  I refinanced one property to come up with the down payment for the next.  Technically I am borrowing that money from one, to pay for the other, which is a very common scenario.

If you have most, but not all, of the down payment, could you get a mortgage at a higher LTV?  If you shop around lenders, that may be an option, and depending on rates/PMI/points may actually be cheaper than borrowing from a friend/family member.

Chris Levarek · Answer

@Connor Kelly Other options :

• Use first rental property to take a HELOC upon for down payment on next rental property.
• Use a Hard Money Lender / Different Bank on the right deal to buy all cash loan to cost or with less money down.
• Partner with another private lender or investor to acquire either all cash, you bring the hustle/muscle and they bring the loan/down.
• Any other way to get it done that makes sense.

Julie Toh · Answer

@Connor Kelly The source of down payment for a rental mortgage can be either own savings or from borrowed sources such as a secured or unsecured line of credit. If it is a borrowed source, the payment will be used in the GDS/TDS calculations. Does this make sense?

Julie Toh · Answer

@Connor Kelly Lenders on the A side allow a borrowed source of down payment from a secured loc for a rental mortgage. Some B lenders accept borrowed down payment from an unsecured source.  Income to debt service ratios must be in line with lender's guidelines.

Conor Kelly · Answer

@Julie Toh Hi this makes sense (you're speaking debt to income ration I assume). However, I've had a mortgage broker tell me i'm unable to use borrowed money as a down payment. Could this be because i'm investing out of area or do you think this broker might be inexperienced? Lol.

Daniel Kong · Answer

@Connor Kelly Sure. Nothing illegal, just let it sit in your bank account and "season". Most lenders will require 2 months of bank statements, but some will require 3 or more. Basically all of the bank statements need to show you started with the balance at the beginning of the statement (let's just say $50,000), and you also ended with that balance. Any large deposits or withdrawals in those statements need to be explained an accounted for.

Conor Kelly · Answer

hey daniel and scott, thanks for the hastey replies. My initial thought was to do this. Is there nothing illegal about doing this? No way I could possibly get in trouble with the bank for doing this or violate any contracts?

by the way Scott, I still look at your posts on "investing in windsor" everyday. Very informative. I appreciate your hard work. 👍

Using borrowed money as a down payment?

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