Using Family Members for loans

16 Replies

Hello all,

I am in the process of purchasing my first rental unit and my parents have agreed to help me with the down payment on it.  Doing some reading and it suggests creating a promissory note set up properly so I can deduct the interest on tax forms.  Is it as simple as that, creating the document and signing?  I'm sure I'm missing a bunch of things here, so if anyone can provide some insight or point me to a good article/blog about the subject that would be helpful.  The loan itself is probably going to be 20k loan @ 7.5% over 10 years.

Financing down payments is a NO-NO.  That creates an additional obligation of funds above and beyond what the lender who provides the rest of the debt.  It also means you actually do not have any skin in the game which a lender is going to look for.  You will need to also have money for closing costs and money in reserves to qualify for the primary loan.

You may want to look up some threads on Non Owner Occupied financing terms or Investment Property loans to gain an understanding of what a lender is going to demand from you before they consider you for a loan.  

The good news, you have some of the pieces with willing parents, by this post we can not tell if you have all of the pieces so it is tough to give too much direction on types of structures which may work for you and what you have available.  If you add a little more detail about the deal and your idea of setup, that might create more commentary around the same.

Thanks for the response @Dion Depaoli.

As far as pieces or how I would structure it I'm looking to get a 2-4 unit property with tenants in place already from costing 75-100k (DFW area).

Parents would put down down payment (20%)

Mortgage Broker I am in talks with would lend the other 80% over 30 years at 3.75-4.5%

I would attempt to finance closing costs over the term of the loan pending property appraises out.

About me:

make 50-60k a year at my day job

Debt to income ratio is very low (car payment for 250 a month and I rent for 925 a month and that's it as far as debts)  

Credit Rating is in the mid 700s

Quick Sample Deal I've found:

Two Duplexes next to each other: Asking 55k each highest I would offer is 85% of that or a nice round number is 100k with closing costs, fees, etc

Gross Monthly Rent= 1775

Loan from parents for 20k @ 7.5% over 10 years= 238 monthly

Loan from lender for 80k @ 4.5% over 30 years= 406 monthly

Taxes and insurance = roughly 350 monthly

Property Mgmt = 175

Tenant pays all utilities

Comes out to +606 without taking into consideration misc repairs, expenses.  I guess another question I would have is what sort of misc repairs, expenses can you use to help calculate other monthly expenses when doing property analysis.

You can count on some vacancies.  I normally use 5% unless I have information to the contrary.  For normal  maintenance on a SF home I use $1,000.  I would probably use $800 per unit or $3,200 per year on your property.  I would budget $2,000 per year for capital reserves.

I am assuming that there are no other monthly expenses.

Good Luck.

Bill

@Gary McKissick  

Let me be a little more forward with my statements so you see the issues with your current plan of action:

1.  You can NOT finance a down payment.  Can not do it at all.  So if you have to pay your parents back, it is a NO GO.
2.  Conventional loans do NOT allow gift funds for investment properties.  (Only primary residence and second homes)  
3.  It is not completely clear if you intend to occupy the property.  You mention, "...a 2-4 unit property with tenants in place".  I am guessing since you also included property management fees, you do NOT intend to live on property.  So, see #2.
4.  You can NOT finance closing costs at all.  So you will need the down payment plus closing costs plus reserves (which I guess since you want to finance closing costs you do not have either).  
5.  The rate offered by the Mortgage Broker is prevailing rate for a primary residence not an investment property.  So he didn't understand what you were trying to do either.  That rate is not in line with the plan you have described here.
6.  The 85% of offer on list price metric is just something you made up it seems.  You should gain a better understanding of how to access real property value.
7.  A $55k property may be tough to finance as the loan amount ($44k) is below conventional standards.
8.  While anything is possible, in this situation I don't see a lender allowing those two assets to be cross collateralized.  
9.  The example asset is closer to $100 a door not $300.  Look up 50% rule here in BP for quick easy math metrics.  The debt service will be higher than what you presumed. Reserves can be more demanding since you have two doors.  Two large items can break at the same time.

If you are willing to live in property some of this can change.  That said, I think you need to do some more reading here on BP to understand some of the concepts you are just brushing up against.  None of this is meant to deter you, just meant to point you in the right direction.  No sense in wasting your time with things that can be done, work on the things that can be.

@Dion DePaoli   

1.) Talk to my broker and he told me different.  Says if you use private money (parents) for down payment you have two options:

1.) Parents co-sign put down down payment and have first lien on the property if everything goes completely wrong. 

2.) Parents can loan you the money then you have to wait I think he said 3 months so when using that money for down payment its not flagged as borrowed money. With these options how does the bank know if you will be paying them back or not?

If this is flat out wrong then maybe I should find a new broker :)

5.) What is the rate for investment properties?

7.) What is the lowest conventional loans will give you for investment properties?

9.) It is 2 duplexes so 4 doors comes out 150 a door and your right with say 15% for vacancy rates maintenance cost it would be closer to 100-125

I do appreciate you taking the time to kick my butt in the matter.  I think maybe I am getting a little ahead of myself and should continue reading and learning to understand all aspects of what my main goal is.  Thanks for the response and have a good day.                                    

So you are asking for 100% now to let's say if the units need a roof do you have a reserve to replace the roof. I think you should save your money until you have the down payment and if anything went south you would be losing your down payment not someone else money.


Joe Gore

1.) Parents co-sign put down down payment and have first lien on the property if everything goes completely wrong.

 WHAT?? - "Co-sign" makes your parents a Borrower with you.  They do NOT get to hold a lien on the property.  (that doesn't even make sense)  The lender will need to be in first position or you will not get a loan.  PERIOD.  If anything goes wrong, you and your parents will face foreclosure which could mean losing all invested monies including down payments and any money paid in payments on the loan.

Can they co-sign with you?  Sure, if they want to and if you all can qualify with everyone added.  Not always possible when you start adding other borrowers as you bring their credit and liabilities with them too.  

2.) Parents can loan you the money then you have to wait I think he said 3 months so when using that money for down payment its not flagged as borrowed money. With these options how does the bank know if you will be paying them back or not?

What he/she (broker) is suggesting is that you deposit the funds into your bank account and then wait three months for the funds to 'season' so they pass through underwriting as your own funds.  Clearly this person has not wrote too many loans in his time.  This is equivalent to loan fraud.  In addition to that, there are other signs and calculations that can be done in order to understand from an underwriting standpoint if the funds are "believed" to be sourced from the borrower.  This is just a dumb idea, don't do this.

The rules are in place for a reason.  The main reason is, folks who can not meet these guidelines or situations that are outside of those guidelines simply do get qualified as more often than not, they can not meet the repayment obligation for various reasons.  Some less than good brokers see guidelines as things to circumvent because they want to cram a loan down your throat and make their commission.  That only serves to put the borrower in a position to not be able to repay despite their good intentions.

My personal opinion of this broker is not high.  I would suggest you find a new one to work with.  I personally would not even talk to this joker again.

As far as the other questions are concerned, I would really not worry to much about them.  Conventional loan minimums are generally around $50,000.  Some local lenders will go lower, but they hold those for their portfolio.  The current 30 year rate is around 4.125% for full document borrower for a primary residence.  

The real solution here since your broker is an idiot.  Look for a multi-unit property where you can use the gift funds from your parents (but only if they do not need you to pay it back) and plan to move into the subject property and live in one of the units.  This will get you an owner occupied loan and give you a chance to dabble in landlord operations with the unit(s) that are rented.  That will eliminate the need for a property manager, since that would be you.  Any property up to 4 units will qualify, provided you move in as an occupant.

As you gain experience and move along in life you will be able to move from that property and rent your unit out.  There are tax concerns and homesteading concerns to look into but in general planning to stay in the subject property for two years is usually the target term.  This gives you a good prevailing mortgage rate, caps your property taxes and can help you pay down your mortgage faster since you have both your income plus rental income to make payments and live on.  Having extra cash with the rental income and your income (since you are not paying rent) will allow you to pay more principal down, faster which will build up equity faster.  (Something you want to do)

If your parents are willing to GIVE you the money.  Then let them simply GIFT it to you.  There are tax consequences for such things, however most likely you both will be fine.  

If they have to LOAN you the money, meaning they will need it back....this is a BAD IDEA for all involved.  Just wait for a new day then.

I agree, search BP here and learn some more.  Newbie green is gushing out of your ears.  It's not bad, we all start with zero knowledge, it is just not right for dubious folks to steer you in the wrong unprofessional direction though.  I can't stand that type of thing.

Glad some of this helped you.  Ask lots of questions here on BP.  We all had to learn somehow.

Good luck.



Have you considered working with an equity partner who has a bit more experience? I'll bet if you ask around you'll find someone living or operating in the DFW area to share in your deal, if the deal is good enough. If it isn't, you probably should pass anyway.

Unless you're planning to move to DFW you're gonna want "boots on the ground" in that area. Denver is a looooonnng way from Dallas when you're just getting started.

Partnering can be scary when you don't know anyone, but the BP community will keep an eye on you, if you let them. Get an recommendation and an introduction, develop a rapport, then "trust but verify". An honest, experienced partner often becomes your defacto mentor.

All the best.

@Gary McKissick Earlier his year I borrowed money from two sources: (1) from a family member with a promissory note in place; (2) from a P2P lender. The money from these sources was used as a down payment on my first investment property. On the HUD form with my portfolio lender I answered "YES" to question "Are any of these funds borrowed?".

The lender has all the required bank statements, etc. and my loan went through like a breeze.  With that being said I don't understand why folks on this thread are advising you that you cannot borrow your down payment.  I did it and unless I'm missing something or my lender is an exception it was a good move for me.

@Gary McKissick  

 Gary, what happens if all your units are not rented. It can happen. How long can you stay afloat if all units are not rented ? 6 months?

IF the property/deal is a good one, just get the money from your parents far enough in advance so it's "seasoned" and the bank won't need you to explain it.

I used money from my fathers HELOC for a down payment. He set up the HELOC for this purpose and I paid his costs associated with it. He emails me the monthly statement and I send him a check (for more than the minimum) and he'll then use that money to pay the HELOC. Good interest rate too.

@Narelle Myke,

If you lie on application the lender can call the note due and I don't think you want to face a judge.

Joe Gore

@Joe Gore Not sure what your comment is based on. Please reread my post where I state that on the HUD form I answered YES to the question if any of the funds were borrowed. The question I am referring to is under "Section VIII. DECLARATIONS" of the HUD form, question "h".

@Joe Gore Correction: the official name of the form is not HUD its the Uniform Residential Loan Application, otherwise known as the Freddie Mac Form 65 / Fannie Mae Form 1003. As you know, this a standard loan application and as I previously posted there was full disclosure about where my down payment came from in the very beginning.