Large down payment - why is this difficult?

26 Replies

I have an interesting issue - I hope this is the right place to post. I have access to private funding (parents) but we don't know how to structure it so I'm the only one on the loan/deed. It needs to be an non-owner occupied investment mortgage. I know the easy way is to let the money sit in my account for 2-3 months and then the bank considers it mine. 

One issue is we have a fairly flexible budget. We're looking at 2-4 unit multifamily properties that range from 150k-400k with up to about 200k to invest (high COL). We started seriously looking in January and at that point they gifted me the annual exclusion limit (we had our eye on a much smaller property that fell through at the inspection stage). Now a potentially great property came on the market at 400k and the money that has been sitting in my account is not near the down payment amount. Are we just screwed for this property and back at day 0 for down payment seasoning? It seems crazy that at ~50% down you couldn't find some reasonable way to finance it.

Outside of this particular property- what are some ways we can structure this partnership? I think we want to stay in the 2-4 unit (non-commercial) area for now. 

Hey @Rachel Stewart , Do you currently have a lender? Have you talked to them about what the rules are and if you can speed up the seasoning process? I know that sometimes the person gifting the money can write a letter to the lender, explaining where the money comes from and sometimes this gets rid of the seasoning time. 

@Alex Bekeza can you help? Do you know what the rules are about seasoning gifted funds? Any way around the waiting period? 

@Samuel Pawlitzki  

Hello Rachel,

Unfortunately, You can only use down payment gifts to purchase a primary or second home, but not for an investment property. With FHA loans, you can only use gift funds for a primary home. That being said, it seems like your best choice will be to purchase this property in partnership with your parents. Perhaps you should form an LLC which you own equal parts of.

As far as how seasoning works in general.  Say this was going to be your primary residence, all you would need to do is provide documentation that the money was properly seasoned in your parent's account before it was gifted to you and probably also provide details of the transaction which moved it from their account to yours.  I hope this helps!  Don't get discouraged, unless their credit is going to kill the deal you should just partner with them on this property and then if there comes a day when you should refinance you can put the new loan under you if you financially qualify at that point in a couple years.

Thanks everyone! 

@Samuel Pawlitzki - Yes I've spoken with a lender. It's my understanding the gift letter is common for primary residences.  

@Alex Bekeza - We briefly considered an LLC. When I brought up the idea to my lender, he said you can't take out a residential loan under an LLC - only commercial. Additionally, we wouldn't have any history as an LLC so it would be hard to get lending. I think this is where I'm confused. How do we structure a partnership or LLC so the end result is using the funds in their account for down payment, I (or both of us, there's no reason my dad couldn't be on the loan other than preference) are on the mortgage/title/deed and also not screw ourselves over at tax time.

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Account Closed  - Thanks, I admit I've had similar tempting ideas but I really don't want to plan around committing mortgage fraud. I do have a younger brother looking to move out of my parents house and stay in the area. I was trying to figure out ways to make that work but I'm really at a loss and as ridiculous as the rules are sometimes I don't feel comfortable blatantly breaking them.  

@Rachel Stewart @Samuel Pawlitzki

If your lender told you an LLC can't buy residential property than that must be a law specific to your state. Maybe consider property in another state? OR he may have meant that you just cannot live in it, because that would be misuse of company funds.

Thats ok though, but you should meet with an attorney/tax professional to set up a partnership agreement.  They should be able to draft a simple agreement between you and your parent stating each of your roles, individual taxation, level of ownership, and investment, etc.

Sounds like you have enough money to make a great investment purchase.  Your only problem now is the legal framework.   I can give these bits of advice and thought but ultimately you'll need to get a legal professional to get all of your answers. Only a lawyer can offer the advice you need so maybe make another post looking for a good referral in your area.  Good luck! 

Rachel, if your parents are willing to be on the loan then I wouldn't think you would have to worry about the seasoning for the down payment since, presumably, they can show that money in their own account? At that point you should be able to do a standard conforming loan with both of you on the loan?

@Alex Bekeza   Thanks! I really appreciate your responses.   

That's where I feel like I'm falling between communication between my lawyer and my lender. My lawyer (who is my family's estate lawyer who also does real estate) was the one who brought up forming an LLC. I've sent both of them probably an annoying number of emails in the past few days trying to figure things out. Maybe I need a new lawyer or lender or both lol

We're really tied to this area. My dad is the big private money in this scenario and he really wants to "start" around where he lives. He's not interested in doing any of the management but he does want to be able to drive past it and understand the area. I realize the amount of money we've got could go really far in other areas but for now we're sticking to the Chicago suburbs. 

@Josiah Collins - that's what I'm currently talking to both my dad and the lender about. I think there was some miscommunication between the lender and myself. There's no big reason that my dad or even both my parents couldn't be on the loan such as their credit. We just assumed the gift route was the easiest way to go - Thanks! 

Have your parents as partners/co-owners and pay them a monthly interest on the money. In 5 years refinance and pay back your parents. At that time you can then remove them from the ownership. They can then partner with you on another property in the same way. 

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couple options.

Just have both you and a parent on the loan. I did that for one of my first purchases as well. Yes it will show up on their credit, but if you're doing well, it'll only increase their credit worthiness later. You can always refinance later down the road into your own name or do a quit claim deed if the deal is worth the extra cosing costs later.

form an LLC with your parents and call more lenders. as long as everyone has good employment history, great credit, and with a lower LTV, I don't see why you shouldn't find one that will work with you. again on some of my earlier deals, I had to call 20-30 lenders before I got a yes. this included out of state lenders and even online lenders. I get commercial loans aren't the best in terms of rate or term but if the property is a steal its better to just eat that cost now and deal with it later.

Buy it cash then it’s easier to retitle or refinance

lol at the guy suggesting mortgage fraud multiple times. If she were going that route she probably would not be here posting about it online.

@Rachel Stewart - you may have issues getting a bank/conventional loan with a newly created LLC, but there are plenty of perm lenders for 1-4 unit properties who would have no problem with this scenario. If you're willing to partner with you parents and create an LLC together, then there should be no issues with source and seasoning of funds.

Thanks everyone! I think we'll probably co-borrow this time and set up an partnership/operating agreement with our lawyer and create a plan; possibly an LLC for the next one. I think maybe the only issue with co-borrowing is that my dad has been retired for ~8 years now so no W-2 income and I'm a 2 yr out recent grad.

For @Thomas S. 's suggestion - where I'm paying them interest on the money wouldn't that be a loan to me and be factored into DTI? If we're co-borrowing how does that work- it seems circular?. Also, if they didn't want to loan it to me, just put it in for "their 1/2" what are the gift/tax implications (now and if/when we refi'ed them off) ?

@Ryan O'Mara - what is a perm lender? 

@Rachel Stewart - perm lender is a lender who does longer term, permanent loans for holding a property for several years.  Which is different than a short term loan like rehab, bridge, ground up construction.

 Also, the lenders I work with don't need W2s.  They don't underwrite off of tax returns but rather how the property services debt.  The main considerations for the borrowers is liquidity, FICO, and not having major issues such as liens, bankruptcy, lawsuits, etc.

Originally posted by Account Closed:

So..... forget the rules. 

It's your intention to live in one unit. After all, your boyfriend lives a block away, right? You can't help it if your boyfriend breaks up with you right after closing and it's emotionally traumatizing to live in the same area as your now ex-boyfriend.

This is Fraud.  Don't do it.

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Originally posted by Account Closed:

@John Woodrich

There is a distinct difference between intent and motive. 

In this case:

intent = deceive mortgage company to give you a loan you would not qualify for.

motive = deceive mortgage company to give you a loan you would not qualify for so you can make money.

(scratches head....)

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Originally posted by Account Closed:

@John Woodrich

That's why you're an accountant and not an engineer!

You are correct - I do have a code of ethics to abide by, you must not.  

I sure hope we don't have engineers skirting the rules to save a few bucks, we would have a lot more bridge failures in our future.

Just because you use the word "creative" doesn't mean it isn't against the law.  A burglar who was creatively thinking about how to make some extra money is still going to jail.

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@Account Closed ; @John Woodrich isn't taking a speculative leap here with his posts. Just about anyone can see that your first post heavily implied Rachel should apply for an OO loan without ever intending to actually live there. That is fraud, and it's unethical conduct.  Playing word games doesn't change that fact; and trying to have-wave it away as a function of an engineer's focus on pragmatism is even more absurd. 

The several engineers I know personally are quite skilled at their crafts, and none would ever consider doing what you're suggesting.  I'm glad you are contributing to this community and you likely have a good deal of value to share from your experiences and your perspective.  But for this particular issue this is very bad advice and not at all the kind of business the BP community is known for practicing or teaching.  Rachel's quick refusal of it is the proper response.

Not to further derail the thread, @Rachel Stewart were you able to resolve this issue? I ran into a similar problem before trying to co-borrow with an individual retired from W-2 work. Although we had multiples of the entire value of the SFH we were trying to purchase, DTI constrains caused us to fail underwriting. If you can't find a configuration with yourself, dad and/or mom that passes muster you'll likely have more success just getting a commercial loan.

Despite the slightly less attractive terms; a good deal with a commercial loan is better than no deal at all.  I've found commercial underwriting to be more rational on the whole.. the property itself plays a much larger part of the process, total assets/collateral are considered for risk controls alongside income, verification/seasoning of personal funds is less stringent... the list goes on.  Hope you're able to find a way to make this work.  Navigating the process gets easier once you have a few under your belt.

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