Banks views on private money

13 Replies

I was talking to mortgage company loan officer and I mentioned that I would be getting a private money loan from a friend for an investment property I’m looking to buy. She said that the bank will generally frown upon that and question about where the money came from. My question is, I know that investors use private money all the time. So, do you guys run into issues trying to financing using other peoples money. Or does private money usually just go to buying a property outright.

My income is sufficient for the loan I want to get and my credit is fine. It just seems to be the issue of the down payment money I’d be using.

What can I do differently??

Thanks in advance

@Mark Lynch , banks will typically not let you borrow from other sources to fund down payments, and typically your private money or hard money lenders don't want to be in a second position on the loan. You can borrow the money for down payments but usually have to structure the deal as a partnership and not as outside debt. Also depends on the type of loan residential loans are a little more restrictive, typically speaking then commercial loans.

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@Stephen Akindona Thanks for the feedback. So, what if I was too borrow from the friend deposit it into my account and hold onto it for a few months then just say it was a gift when asked by another bank lender. Could that work?

The whole point is I came across a property that I can get for half of what it’s worth from a friends grandmother. She’s older and just looking to be done with it with as little hoopla as possible. She owns it outright. So, I will have about 70k built in equity right off the bat. My plan was to borrow the 15k from a friend, get the property rent it out and refinance in 6 months, pay him back, and still have money to play with for my next deal.

I think at the end of the day this is loan fraud. If you have to make any false representations to a lender I would stay clear from doing that. 15k is a low enough amount that you could use a credit card to finance the deal. Or just make your friend a partner in the deal. I would not recommend making any false statements to a lender!

@Mark Lynch

Private lenders  whether an individual or fund based are generally not competition for banks but very few bankers understand the private and hard money space. Banks don't like speculation and don't understand this business model. Generally the bankers that do are investment bankers, market makers and are connected to FINRA licensed professionals.

@Mark Lynch

Most, but not all private money is lent on a first lien basis. So it’s not down payment, money, it’s an alternative to conventional or institutional financing.

Since the money is being provided by individuals, there is an opening for rather unconventional lending. There are some established private lenders that will, on an individually determined basis, provide money for a down payment and secure their position with a junior lien and or equity position.

With a transaction of the size you are contemplating, your most probable chance of success lies with an individual whom you have already established a relationship with or one you meet at a real estate investing event.

Your deal becomes easier to structure if you have even a small part of the purchase price to invest out of your own funds. Convincing someone to provide say 12,500 for tHe down payment while you provide the other 2500 is much easier than convincing them to provide 15000 while you invest no money. Everyone feels better when the borrower has skin in the game.

Here’s what I suggest. First, get the property under contract subject to financing (assuming the seller won’t consider carrying back a note). Leave yourself 90 days or more to close. Then work all avenues to secure the financing, in all combinations. You may have to offer an equity interest of as much as 50% to the party providing the down payment. If at the end of 60 days you can not secure the financing, then “flip” the contract to an investor for an assignment fee.

Good luck

@Don Konipol thanks for detailed response. I really appreciate it! I’m going to explore all options for securing this property.

The place is a win, win, win for me. Getting it for half what it’s worth ( built in 60k in equity), instant rental unit move in ready and has an attached office space and 2 bay garage, I can run my business out of.

I’m even weighing out a hard money lender for the entire purchase price.

Thanks again

@Mark Lynch

Ask Grandma to sell you the property and tell her you'll make her monthly payments for 3 months.  Once the property is in your name refinance it using a portfolio lender for the full appraised value (assuming your numbers are solid), pay her back and put some cash in your pocket.  

@Mark Lynch

That sounds like a great deal! Definitely do whatever you can to get creative and make it work! I would also shy away from doing things that require massaging information to a lender.

You mentioned that she owns the property outright. Have you brought up to her about the Owner Carry (Seller Financing) option. The best part is you can structure the deal with whatever terms accomplish both her and your goals.

You can structure it where you pay her your “mortgage payment” for as long as it takes to save as much possible for the down payment to re-approach the bank.

Good luck!

  1. Originally posted by @Mark Lynch :

I was talking to mortgage company loan officer and I mentioned that I would be getting a private money loan from a friend for an investment property I’m looking to buy. She said that the bank will generally frown upon that and question about where the money came from. My question is, I know that investors use private money all the time. So, do you guys run into issues trying to financing using other peoples money. Or does private money usually just go to buying a property outright.

My income is sufficient for the loan I want to get and my credit is fine. It just seems to be the issue of the down payment money I’d be using.

What can I do differently??

Thanks in advance

Mark,

Conventional mortgage lenders typically want the money in your bank account to be "seasoned" - meaning it has to be there for a few months (3 to 6 months). The solution? I can think of 4:

  1. Raise private money for the whole purchase price not just the downpayment - then refinance with conventional financing once it's rented/stabilized
  2. Use hard money also for the whole purchase
  3. Put up an LLC and raise capital as equity and have the LLC's money as downpayment but still have it seasoned for at least 3 months
  4. Open a Business Line of Credit (if you have a credit score of 720 and above) and use that money as downpayment

@Mark Lynch usually the down-payment must be borrower funds. Some lenders may allow for some of the down-payment to be gifted to you but it's usually capped at like 20% of the downpayment. Also, you usually cannot use debt to procure further debt. 

You can either see if they're ok with you seasoning the funds in your accounts for 60-90 days prior to loan application or getting the private investor to be part of the loan. 

If that doesn't work, you may be better off going the non-bank route and working with an investment property lender. But still, in that space you should expect that they'll want to see the source of funds and may require the private investor to be part of the loan (perhaps through an LLC). But you can structure the ownership interest in the LLC so that the borrower doesn't have to have their credit pulled (but they may still need to serve as a guarantor -- it depends).

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