Using loan for 20% down payment- Will I be approved for mortgage?

10 Replies

Here's my situation: 

I want to buy an investment property at 20% down (which would be $10k-11k).

I can get a loan for the down payment (talked with a credit union already). If I choose 5 years for repayment of this loan, it will be about $210 a month. 3 years would be $320 a month.

Are there lenders that would approve me for a mortgage if I used this loan to pay the down payment? i.e. I would have a $210 or $320 monthly payment in addition to the mortgage payment of around $500-$550?

The property would bring in about $950-$1000 a month in rent and it's in great shape. So it will cash flow a little bit even with the 2 payments.

Would it come down to DTI ratio?

This is a great investment opportunity I don't want to pass up, so I want to explore all my options for financing.

Secondary question- would it affect my mortgage approval chances if the loan for the down payment was a home equity loan vs. an unsecured loan vs. a private money loan?

@Sam Burnoski the details to this are very important to understand. First, you aren't permitted to borrow funds, unless those funds come from a piece of real estate, to purchase an investment property with a conventional loan (meaning Fannie/Freddie loans). If you are using a "portfolio" or "commercial" loan then each bank could. So if your loan is an unsecured loan, and you are seeking a conventional loan, then we would need to structure this in a couple of ways:

  1. Get a business account.  Deposit the funds into this business account.  Using a business account means you don't have to source the deposit.  If you place the funds you borrowed into your personal account the bank will require you to "source" those funds - meaning you have to explain them and provide paperwork.  And once they find out where the funds came from you would be declined.  Again, this is conventional rules.  But if you have a business account then you don't have to source.  HOWEVER, not every bank will follow this "non-sourcing" rule.  So  you would have to interview your banks first to see if they don't source deposits into a business account.
  2. Since you are using this for business purposes ask the bank if you can place this in your business name. That way, it doesn't even factor into your personal DTI. Your income might support the payment anyway but if it's possible to put under the business name then that's the preferred route.

Both of these strategies will require you to create a business but if you are in the investment property business you should have your own business entity anyway.  Let me know if you have any other questions.  Thanks!

@Andrew Postell thanks a ton for that response. Very helpful. This is an option I have not explored. 

Would an LLC be the type of business entity that would work best for this?

Also- I have about $20k in equity between 2 properties. I probably won't be approved for a HEL or HELOC because my LTVs are high. Would a portfolio or commercial lender allow me to borrow against my combined equity if I wanted to take out the aforementioned loan for $10k-11k even if I have a high combined LTV?

I really would like to find a way to keep building my portfolio.

@Sam Burnoski I would caution you to really nail down the numbers. A $550 mortgage payment, plus the $250 short term loan, on a place that rents for $1000 is probably negative cash flow. Factor in taxes, insurance, and reserves for maintenance and vacancy and that $200 "cash flow" disappears quickly.

@Sam Burnoski most portfolio/commercial lenders will want 20% equity in your investment properties.  They would likely NOT allow such a small loan stretched between two properties.  

@Jason DiClemente thank you for the input. That is a good point. On this property I am not overly concerned with cash flow as much as building equity, though.

@Andrew Postell do you think an LLC would be the best business entity to use to achieve what you mentioned above?

@Sam Burnoski , others have already answered you well on the loan aspect, so I am going to address the property itself.  This is not a good investment property.  It's what long-timers call an alligator.  Negative cash flow will eat you alive.  Your "equity building" strategy doesn't work if the market drops 10% by next year.  This is a classic mistake made by many investors in the years leading up to 2008-09.  We're due for a correction any time.
A good rule of thumb is to assume your property--even a well-maintained one--will consume 30-45% of rents in expenses: taxes, insurance, maintenance. Then take out 5% of gross rents for CapEx repairs and 5% for vacancy/non-payers. Now take off 10% for property management, which if you are self-managing needs to be paid to your take-home bottom line, or you are "working for free"...not a good goal for one aspiring to be an investor. Donated hours are okay when you start out, but this property is going to be relying on them for a long time unless your rents take off like a rocket.
If your goal is to build equity, just put money into a bank account.  Same difference as putting it into a house, except bank accounts don't go down in value and they are liquid and can be cashed out at any time.  Real estate is non-liquid, and to get your equity back you incur large expenses often and may need to access equity at a time when the market is down and steals a lot of it.
Ah, but what about appreciation?  See the last sentence of preceding paragraph.
Please, find something that will pay you for the privileged of owning it, not the other way around.  Cash flow is the meat and potatoes of rental property investing.  Appreciation is icing on the cake.  Unless you're living next to Disney World and they're eyeing this house for their next roller coaster....find a better deal.

Not being concerned about cash flow is a extremely knave approach to real estate investing. It is how so many went bankrupt last down turn in the market. Unless you have very deep pockets, are investing in a well known and proven never lose high appreciation market and have loads of cash to park that you will never have any use for.

In which case of course cash flow is irrelevant.

@Sam Burnoski yes, a LLC is generally the business entity of choice for investors. As always talk to your tax professional but that's what entity most investors use. Thanks!

You guys don't even know the property I'm looking at. You know no information- not where it's at, not market prices, not anything. And you have no idea how I run my systems. You cannot make a judgement. It is laughable that you are calling this a bad investment with zero information.

Also, $550 mortgage payment already included the taxes and insurance in the escrowed mortgage calculation. Tenants pay all bills, too. I have money saved for reserves and maintenance, but this is a very low maintenance place.

I am well aware of the expenses incurred in a rental property investment. I have some myself (and cash flow pretty well). Actually, I calculate everything very conservatively, and I only pursue something if I think I can get it below market value. I don't have to prove this to you. I simply wanted a question about loans answered.

And the bank account analogy? Seriously? Is someone going to sign a binding contract to put money into my bank account each month? because that would be a more appropriate analogy. Say I owe $800 a month (for the first 3-5 years only, mind you), I would bring in $950-1000 a month, then I would have someone PAYING THE MORTGAGE AND EXPENSES (minus repairs/maintenance) for me. And if an expense pops up or I have a vacancy or eviction (unlikely because of the area and because I have good tenant selection criteria), then I will take the negative cash flow for a month here and there. 

That is basically one of the foundational upsides of rental property investing- have someone else pay and build equity for you. I am not banking on appreciation, but I know this property is under market value as it is. If it doesn't increase in value when the time comes and I do want to sell it (I plan to hold this one for possibly decades), I've just paid down thousands and thousands on this loan on someone else's dime.

I'm not gonna give out any more personal information or hints at what this property might be. And I'm probably not gonna respond to subsequent posts unless someone wants to help me achieve my loan objectives- which would be greatly appreciated. I've already gotten needlessly worked up and wasted too much time on this reply.

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