Raising money privately from a friend

7 Replies

Hello everyone, I have the option to borrow $35,000 from a friend as a loan. Lawyers would write everything up so it’s legal. He’s only charging me 2% on the entire loan for a 7 year period. I plan on taking that money and buying 3 sfh that will rent for $850-900 in my area. Problem I have is how do I get that money into the bank without raising red flags?

@Tom Roarabaugh - Typically you only need to show the bank your last two months of statements. So have your friend fund the loan, wait two months, and then engage a bank. You are only paying 2% interest (which is ridiculous!), so two months shouldn't kill you. 

Also - some banks will accept gifts as a form of down payment. Keep calling around and asking. 

@Craig Curelop I just assume they would want to know where the money came from. I suppose i could tell them about the money upfront. Was just hoping to not have them look at it as affecting my debt that needs paid back. I know the tenants would pay it back but it would’ve just been easier.

@Tom Roarabaugh

I highly doubt they would ask any questions. I filled out a "gift" form when I was underwritten for my duplex. A relative had loaned me some money for college tuition costs as a gift and I just told the bank it was a downpayment for the duplex (even though I spent it before the property closed). 

I wouldn't worry about it too much, man. 

35K might seem like a lot of money, but to banks and lenders, I'm sure they are just happy you are coming along so they can write more loans! 

@Tom Roarabaugh Since you mentioned underwriters, I assume you’ll be buying a property with bank financing and this loan from your friend will be to help with the down payment. If that’s the case, and you really do want to keep everything legal and above board, you should do two things. 

First, disclose to your loan officer/bank that you're financing all or part of your down payment. It'll have to be factored into your DTI calculation, but the only way around this is to hide and/or lie about the source of the funds. Don't do that.

Second, the interest rate your friend is charging you is low. That’s really nice of him, but it might be a little too low. Google and read up on “IRS Applicable Federal Rates” and “Imputed Interest”. Here’s a couple links to get you started:

Applicable Federal Rate (AFR) Definition

The tax-smart way to loan money to family members

Those links will just give you a basic understanding of what it is, but double check with your tax professional to be sure if/how it might apply in your specific situation so you or your friend don’t get hit with any unexpected surprises later on.