Personal Loan as Down Payment on Conventional Rental??

Question

I'm planning on buying my next rental property at the end of this year using conventional financing. I currently have 2 rental properties, so in addition to the 20% down payment I will also need to show proof of funds for 6 months reserves on all 3 properties. I will be able to save almost enough by my target date to cover the down payment but I'm considering using a Personal Loan to cover the rest. I know there is a seasoning requirement for funds so i plan to have the personal loan in place at least 2 months before the purchase and then show those funds in my account to cover the rest of the DP and reserves. Once I close on the house, I plan to pay off the remaining balance on the personal loan.

Does anyone see any potential issues with this? Would the conventional lender know or have issue with me using a personal loan as DP/ reserve funds if it took place before their seasoning requirements date? Would it show up on my credit report and send up a red flag?

Does anyone see any potential issues with this?  Would the conventional lender know or have issue with me using a personal loan as DP/ reserve funds if it took place before their seasoning requirements date?  Would it show up on my credit report and send up a red flag?

Monique Cook · Answer

Hi Mike,

I'm just reading this post and would love to know what you finally did?  Did it work out for you?  Looking back, would you have changed any methods?

Thanks for the knowledge!

Jerry Padilla · Answer

@Mike Matern

You can use a personal loan for a down payment, but not reserves. The loan payment would count against your DTI's.

Joshua Jordan · Answer

I would also like to know how this worked out for you Mike.  I am contemplating a similar strategy.

Mike Matern · Answer

It's been a while since I've replied to this thread but to anyone who is still following, I've been thinking of how to go about this and here's my thoughts:

What if I take out the personal loan now (5 months before my projected purchase date) and use the funds from my personal loan to pay my regular monthly expenses which are for simplicity $5k per month.  If I get a $25k personal loan, then in theory the funds from my personal loan would be exhausted by the time I go to apply for the loan for my purchase.  In the mean while, I'm saving my regular income which I would have been using to pay my regular monthly expenses.

So by the time I go to buy the home I'll have enough "saved" to cover my DP and reserve requirements, I'll have used up all the funds from the personal loan and I'll have about $24k remaining balance on my personal loan (which I'll pay off with my reserves after closing on the home).

Does this reasoning make sense to any of you lenders and would it be an accepted method of showing proof of funds?

Zack Karp · Answer

@Mike Matern

You never mentioned FHA before in your OP.  Correct, FHA does not do investment properties (unless you had purchased as a primary, and then convert it to a rental after a year, you can then do a streamline refinance to a new FHA loan as investment).

But for Conventional financing, yes you can get 15% down for a 1-unit investment property (SFD or condo).

As for the personal unsecured loan for down payment, you are correct, the conventional guidelines technically do not allow this.  However, there are ways to maneuver around this, because a loan secured by an asset, virtually any asset, can be used.  Assets can include automobiles, artwork, collectables, etc, in addition to traditional sources like real estate or financial assets.

Let me give you an example.  Let's say your wife, or your Uncle Bob, got an unsecured personal loan.  And in turn, they gave you a loan against your baseball card.  That would be an acceptable source for down payment.  As long as the person lending the funds is not a party to the sale, the terms of the loan are documented along with the collateral, and there is evidence of your receipt of those funds.

Again, make sure you are working with an experienced loan officer that can help you navigate the guidelines, to avoid any missteps.

Mike Matern · Answer

Thanks all for the feedback!

@Zack Karp - I can get 15% down even though it is a non-owner occupied rental with FHA?  I thought FHA only applied to owner occupied properties.  Also, are you sure the personal loan can be used as down payment funds?  I've read on lendingtree.com since posting that:

"Because personal loans are unsecured, most mortgage programs do not allow them as sources for down payments."

Zack Karp · Answer

@Mike Matern

Are you required to put 20% down by your lender?  If you are buying a 1-unit property, Fannie Mae only requires 15% down.  Your lender may have an overlay there.  That extra 5% in your pocket might be helpful.

The personal loan monthly payment will count against your debt-to-income ratio.  It does not need to be seasoned, you can do it about 3 weeks before closing to safely have it documented in time for your clear to close and TRID timing.  You can apply this money as your down payment, and your own funds can count as reserves.

Make sure you are working with an experienced loan officer who can help navigate this with you for a smooth loan process and no surprises.

Tom S. · Answer

@Mike Matern  On the loan application it asks if any of the downpayment is borrowed, so you'll have to answer that.

Yes, I'm assuming the personal loan would show up on your credit.  How critical that is, is up to the lender.

Good luck!

- Tom

Jeff B. · Answer

When declaring your income & debit, the bank will see the personal loan - - *may* impact your DTI.

Personal Loan as Down Payment on Conventional Rental??

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