Unable to use a “gift” for down payment???

13 Replies

Long story short. Found a great deal. Found a private lender to provide the 20% down to purchase the property. In the process of getting qualified for a conventional loan, was told I was unable to use a “gift” of 20% down from a friend or partner to use as a down payment. Now I know I’ve read a million times of investors using a lender to fund the down payment, then a hard money loan to fund a rehab if necessary.... and there’s got to be a better way then letting that money “season” in my account for 6 months to qualify. The lender would be out of his money for 6 months and the deal would surely be long gone...

What’s the best way to go about this? Have the lender get qualified and put the mortgage in his name, and the title in both our names? What if he wasn’t looking to be an equity partner but just wanted a percentage of return on the money he lent for the down payment? What if he had the money but not the credit? What strategy am I missing here? Thank you in advance for your time to respond!

FHA I believe can have the downpayment from anyone. Conventional as far as I know can only be from family. I don't think it's going to be possible in that scenario.

You are best to get something in writing or you could get screwed. Personally I don't think I would go that route. He won't be able to get the loan if his credit is bad. However FHA is a little more lenient on credit. It sucks and I have been there. My only solution was to get a 2nd job which allowed me to get the downpayment I needed. Not ideal with kids, but I made it work.

Sounds to me like you need to find a new lender. I've not heard of anyone restricting gifts of down payments, so I would keep shopping. If it was pitched to the lender as a loan, that could be where you ran into an issue.

@Joel Johnson @Brent Paul

Did some reading and you are correct. FHA allows family to gift a down payment. For example, you get married and your grandma gifts you $10k, you can use that towards a house. However, a underwriter can have questions on where the money came from and you'd be required to have that person fill out and sign a "gift letter". Conventional also allows family to contribute with a gift letter, but it's much less lenient. But it strongly states for an investment property, you can not use a gift as down payment.

I’m sure I can get more “creative” in my “creative financing”, but when someone is handing you money, and you can’t use it.... There’s got to be a loophole or something I’m missing.

I didn't pitch it as a loan and was very clear i had a partner that was helping fund the deal. Maybe you're right though, and I just got ahold of the wrong lender. I do have him pre-approving me for a FHA. Once my lease is up next October, I'll be buying a property for a live and flip. But would love to have a BRRRR under my belt before then.

If I can't use a gift, I'll just have to put in some extra work and save it myself. But I know there is a way to use "OPM" to get this deal done... Maybe I'll contact a HML and see if they'll fund it. It's a strong enough deal that I could refi and pay it back quickly...

I’ll keep researching and update this discussion when I find another answer.

“Borrowing” the down payment is not going to work for fha or for conventional...period.  Also, few lenders will lend the down payment as a second mtg with no cash of your own in it.  You’ll need an equity partner, not a lender for a down payment.

@Wayne Brooks

If you find a seller willing to work with you, they can contribute towards "closing costs" and you can just pay that much more for sales price. Not sure if lender will do it for investment property purchase, but I have done it with some buyers. Also, depending on the buyer's situation, FHA does have a down payment assistance program. Maybe you can move in the property as your primary residence for a period of time. That opens up more options, too.

@Wayne Brooks @Robert Nelson

Great info guys. Thank you. 
So let’s say I pitch the idea of an equity partnership. From what I’ve read, that type of partnership would be structured as such. My partner puts down the cash for the down payment and closing costs, and I take out the mortgage and do the work. Then cash flow and equity is split 50/50 or whatever other terms you decide. How does this work then? The partners down payment isn’t considered a gift at that point? Would the lender just need his bank statement then too so he can also be held accountable if the lender needed to go after someone to get his money back? 

I don’t know what the Fannie/Freddie rules are, but banks always ask for 2 months of bank statements. So as long as that ‘gift’ has sit in your bank account for two months, it no longer looks like a gift.

(Not recommending you do anything against your bank/mortgage guidelines, but I know that works for some who do get money from family).

If it’s a loan and reported to credit agencies, remember the debt will show up on your credit report - which might not be a bad thing either.

@Brandon Hayes Hi Brandon, I used a private lender ( family member) for a 18k down payment actually wasn't conventional now I realize but it's definitely easier using investment purchase loans etc and OPM. Some great advice on this thread. 

I had to revisit the "partnerships" chapter in Brandon Turner's "No (and low) Money Down" book to find the info I needed. If your partner is paying for the ENTIRE purchase of the house, it can be done and you can decide on the specific terms of the deal, whether it's an equity partnership, or a fixed rate of return partnership, or if you bring in a hard money lender to fund the ENTIRE purchase, you can bring in a partner only for their credit if yours happens to be poor, so you can qualify for the refi after the rehab and pay off the HML.

    BUT, the only way I’ve found to pull off a partnership where the partner isn’t providing enough to fund the entire purchase, but only the down payment, the mortgage must be in his name. So he’d be the one getting prequalified and therefore it’s his money in his account and not a gift as it would be if he gave me the down payment, and then I tried to get prequalified. 

    I hope I’m not breaking any rules posting part of Brandon’s book for other to see here, but it is a free e-book for pros so I don’t think it can hurt. 

    “Brian, a relatively new investor, located a triplex in his neighborhood listed at $120,000. He knows the property will make an excellent rental but has no cash to purchase the property. Brian knows he needs a 25% down payment plus about $10,000 to cover minor repairs and closing costs to make the deal come together.
Thinking creatively, Brian talks with Samantha, his aunt, who has been interested in investing in real estate for some time but has been too busy with her day job to jump in. Samantha agrees to pay the $40,000 needed to purchase the triplex and gets the loan for the property in her name, but both Brian and Samantha put their names on the property’s title. They obtain a mortgage for $90,000, and all the monthly expenses (mortgage, utilities, management, vacancy, capital expenditures, repairs, etc.) come to $1,400 per month. The triplex is rented for $2,400 per month, so each month, the two make around $1,000 in positive cash flow, which they split 50/50.
Someday, when they sell, they’ll split the proceeds 50/50 as well and trade up to a larger deal together. Brian was able to generate $500 per month using no money of his own, just creativity.“

@Joel Johnson I have an FHA, got the down payment from my parents. It seasoned in my account for a year and a half, and they still required proof of the transaction from my parents' bank before they could release it. Have you seen something like that before?

Originally posted by @Jeff Grana :

@Joel Johnson I have an FHA, got the down payment from my parents. It seasoned in my account for a year and a half, and they still required proof of the transaction from my parents' bank before they could release it. Have you seen something like that before?

Jeff, I haven't. Especially for FHA, can't imagine what they would've been worrying about. Unless the downpayment amount didn't quite match age and income.

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