Can you use a personal loan as a downpayment on a rental property

Question

Hello all, just wondering if you can use a personal loan for the 20% down payment on investment property.  I've heard that if you let loan money sit in an account for a little while then this is possible.

Frank Chin · Answer

Banks calculate a DTI, debt to income. Usually that includes your current mortgage, loans, credit card debt, and the new mortgage you'll be taking on. But with a HELOC, it won't go on as a debt till you actual go to closing, writing out the HELOC check from the HELOC account. With this DTI analysis, it's OOPS, where did the HELOC go?

Normally they want to see the money in the bank for at least 6 months, or better yet, a year, which is why they call it seasoned. They sometimes ask where it came from if it's recent. In many cases, what people do is get the money from a relative, or friend, give the bank a gift letter from that person, then turn around and pay that person from the HELOC. Fraud? Suppose if you're caught in a few other things like people involved in the Trump campaign, they can get after you.

In our case, in our purchase, my wife had a $100K account with her mom that she manages, plus we got ourselves a $120K HELOC which we haven't used yet. We already put a deposit down of $6K and only needed $14K more. It's easier if we just use the HELOC? But as often is the case, there's a small complication, and as a sharp investor, are we going to be savvy, take the next step, or say "oh my, what are we going to do now"?

I've been business for a while, and often, I hear people say "I want to see a step by step procedure" which these podcast don't give you. So am I going to be standing around with a $120K HELOC and couldn't figure out what to do with it, because the podcast didn't go into it step by step?.

Josh VanAusdale · Answer

I believe HELOC is okay to use regardless.  I was just inquiring about a personal loan outside of using your home's equity.  I have heard (and been told) that this is a potential way to get into real estate, to obtain a personal loan and let the money season in an account for a few months.  Sounds to me like it's a sketchy option from what was said above.

Tyson Dierschke · Answer

I’m confused. I thought using funds from a HELOC to invest was common advice. I know I’ve heard it many times both when reading in here and listening to the podcasts. Or is HELOC generally only used for rehab and not as down payments to leverage new properties?

Josh VanAusdale · Answer

Thanks all.  Just what I was looking for!

Frank Chin · Answer

Short answer is technically NO. I ran into trouble doing that when I was taking out a mortgage, told the bank the down payment will be from my HELOC and they said NO. Told me it had to be in seasoned funds. Fortunately my wife manage finances for her mom and had an account for over 10 years with $100,000 in it. They don't check where your money comes from at closing so you can still use whatever funds you got from where ever it is.

A friend of mine arranged to have a bank account with requisite funds in it, by having a friend add him to a savings account for a small consideration when he went investing. Again, the account is just for show.

Andrew B. · Answer

You need to disclose any debt you have incurred to your mortgage broker. Failure to do so, is mortgage fraud.

When you get a mortgage, they ask for your most recent 2-3 bank statements. Any large cash deposits must have an explanation. That's why you were told to let it sit a few months. That being said, its still mortgage fraud. Plus, if you cant afford the down payment how will you fix an emergency repair?

That being said, you can get a loan for down payment and apply for a mortgage and disclose the debt to the bank when you apply for a mortgage. Most banks don't like to hear that you have used a loan as downpayment, but maybe you have a relationship with a small bank that will allow it. Who knows.