Personal Loans For A Real Estate Down Payment

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With the down payment presenting the largest difficulty for most people want to buy right now, I am covering every base I can think of as a place to get a down payment. I have covered VA Loans, FHA loans which require a relatively small down payment, and Municipal first time buyer programs, some of which can take the place of a down payment. There are also seller carrybacks and lease with option to buy. There's also the traditional "Save it over time", and in some circumstances, you can also borrow from your retirement accounts or even take a withdrawal. You can even Sell Some Stuff. But there is at least one more entry to the pantheon.

Most people don't think of it, but a personal loan is one of the ways to get a down payment quickly. It has some notable drawbacks, but it can be done. Being unsecured, the interest rate is higher than real estate loans, and the repayment period is shorter, meaning higher payments.

A personal loan is a loan not secured by real property. Because it is not secured by real property, all the lender really cares about is the payments and whether you can qualify for their loan by underwriting guidelines including the payments for such a loan. Personal loans include car loans and student loans and just about every other type of installment debt out there, as well as personal lines of credit and even credit cards. Not all of these are a possibility for the subject at hand, which is rapidly acquiring a real estate down payment. CREDIT CARD CASH ADVANCES ARE RIGHT OUT!. But the possibility exists of borrowing enough to get a down payment with a personal loan.

This possibility includes both institutional loans from a bank or credit union, and "good in-law" loans from family members. Negotiate a loan contract, sign it, and be certain to disclose it to your mortgage lender on your mortgage application so that they know you're not trying to pull a fast one. The reason why mortgage lenders are obsessed with sourcing and seasoning of funds is because they don't want an undisclosed loan, which might mean that you cannot really afford the all of payments you're going to be making. But a fully disclosed personal loan is just like any other open credit. It has a repayment schedule, maturity date, etcetera. The mortgage lender looks at the situation, including the loan that got the down payment, according to lending guidelines, and if it appears you have the income to make those payments, they will approve the loan.

The major and irrefutable drawback to getting a personal loan for the down payment is that it impacts debt to income ratio. You have to account for the fact that you owe this money, and you are obligated to make those payments, and therefore, you cannot afford as big a real estate loan as you otherwise could. Since most people try to stretch their budget further than they should anyway, this can be a deal-killer. It can force you to buy a less expensive property than the one you have your heart set upon, or even than the property you could otherwise afford, at least by debt to income ratio. Of course, if you don't have a down payment, you can't buy the property of your dreams either. But if you buy a property, especially while the market is down, leverage can mean you will be able to buy the property of your dreams much sooner and much easier, or in plain words, buying the less expensive property is smart if that's what you can afford now. Of course, if you've got more than enough income but no down payment, that's the situation where getting a personal loan for a down payment is a serious possibility. Say you're a doctor who just spent the last two years paying off your student loans ahead of schedule. You've got a great income, but you spent everything on getting rid of that debt, and as a consequence, you don't have much for the down payment, right when it will do you the most good.

It is possible, for some people who have a large down payment but are nonetheless getting a loan from somewhere (most likely a close relative), for the loan to be a subordinate real estate loan. This happens mostly when Mom and Dad are rich and doing estate planning. They loan Princess (their daughter) and her Darling Husband some money to make it easier to buy, often planning to forgive the debt in accordance with federal gift guidelines. Note that the thing controlling it here is that lenders have guidelines that set maximum comprehensive loan to value ratio (CLTV), or the ratio of all loans secured by the property to the value of the property. Even though they may be in first position, lenders may not be willing to loan when there's another loan behind theirs on the property if the CLTV is higher than underwriting guidelines allow. It is necessary to make certain that the lender you apply with will permit any other contemplated loans. And even though Mom and Dad may be intending to forgive Princess' loan in accordance with gifting schedules, Princess and Darling Husband still need to have an official repayment schedule on the loan and those putative payments must be taken into account on the debt to income ratio.

One more thing I should mention is that if you're going to do this, the personal loan needs to be in place before you apply for the real estate loan. Contract signed, funds dispersed, at least one payment made, preferably two or more, and preferably reported to the major agencies. Failure to do any of these is a potential failure point for the real estate loan. The only exception is if you're trying for a subordinate loan, and the lenders have been especially unforgiving of that lately. I've had people I did the primary loan with a private money second previously, unable to refinance even with the same lender. Yes, this means that if you can't get the real estate loan, you still have this loan which you didn't want. This whole idea of personal loans to get a real estate down payment is risky and has downsides. It is not something to try if you have a better alternative, and not without careful scrutiny of all the numbers beforehand, and even then it can fail. It is a risk.

I must emphasize this again: DO NOT TAKE A CASH ADVANCE ON YOUR CREDIT CARDS!. Unless you have credit limits in the multiple hundreds of thousands, your credit score will plummet, and you will be unable to qualify for the loan no matter how much income you have. I will bet a nickel that someone will email me saying that they "did what you said," and that now they cannot qualify for the loan because their credit score is in the toilet. If you write me with such an accusation, I will drag you down to the zoo, where I will arrange for the elephants to do a line dance on your sorry carcass, and the rhinos to use what is left as a target for both ends. Taking a personal loan for a real estate down payment is playing with fire. If you're going to do it, make certain to follow lender and loan officer instructions exactly and carefully. There are a number of other pitfalls, that may not be as bad as the credit card cash advance but will still sink your loan. Getting a personal loan for a mortgage down payment is the mortgage equivalent of a circus high-wire act - one wrong move and the whole thing is a disaster where people get crippled for life even if they aren't killed outright. Having the numbers be right for it is not a common occurrence. But if the numbers are right, and you and your loan officer are careful, it can work.

Caveat Emptor

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This page contains a single entry by Dan Melson published on May 2, 2013 7:00 AM.

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