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My recent wife and I have our eye on a nice home that is being auctioned off by an elderly lady who's moving in with her daughter. In our home search, we already have pre-approval for up to 250k FHA mortgage, with down payment + estimated closing costs of 16k that we could comfortably afford.

Our problem is, the home we have our eye on requires 25k down on the day of the auction, and we're a little short from having the savings to put that down comfortably. The mortgage company says we can't finance the down payment for a home; it has to come from savings.

I'm wondering: since the 25k down requirement is from the seller/auctioneer and not the mortgage company, is there any way to put down 16k of our own cash and finance the remainder of the down payment for the auction? I get letter offers in the mail for personal loans all the time. Assuming that taking out a personal loan doesn't hurt my debt-to-income ratio or credit score too much, would it be possible to borrow 9k in a personal loan, to afford the 25k down? The FHA down payment of 3.5% would still come from our own savings.

I don't know much about the legality or common policies. Any help at all in ideas or resource, terms to research, etc., would be greatly appreciated.

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    Doing exactly what the mortgage company told you not to do is not going to go over well with them.
    – Nuclear Hoagie
    Commented Feb 27, 2019 at 18:21
  • Why not apply for a conventional mortgage if you have a down payment? The closing costs will be a LOT less.
    – D Stanley
    Commented Feb 27, 2019 at 18:23

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Anything you borrow for that down payment will hurt your ability to get the loan package you need.

The lender doesn't want to see the borrower getting a loan for the down payment. They don't want to see a signature loan; they don't want to see a cash advance from your credit card; they don't want to see a loan from your 401K; then don't want to see a loan from a family member or friend.

Those loans have to be paid back, and that limits the amount of money you have available to make the monthly payments on their loan. They go so far as to ask for x months worth of bank statements looking for large deposits that might mean you have an undisclosed loan. They make you and the "friend" sign documents that state a gift is not a loan.

That requirement for 25K in cash is going to be the biggest hurdle to buying the house at auction. You will also have a tight timeline regarding getting a mortgage for the rest.

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    Great answer. Frankly the auctioneer does not really want the OP to bid on the house. They are looking for buyers with much more solid financing, or better yet, none. These kinds of things are meant for cash buyers.
    – Pete B.
    Commented Feb 27, 2019 at 19:01
  • Speaking from experience, 401(k) loans don't affect the underwriting process unless you listed your 401(k) as an asset for securing the loan. 401(k) loans don't force you to repay them (though you should never take one out to begin with), and don't hit your credit if you default. They just carry heavy penalties, and heavy loss of future income.
    – GOATNine
    Commented Feb 28, 2019 at 14:35
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Generally speaking, the only loan in the USA that I know of that won't raise red flags with the underwriter is a 401(k) loan or similar. I would recommend highly against taking such a loan due to the compounding loss of growth (cost) such loans incur. You are free to take a personal loan at will, but keep in mind that a pre-approval is not cash in the bank, and that loan for the down payment may lead to rejected underwriting on the mortgage. Consult with the mortgage officer handling your loan before making such a move. As an aside, I would also advise that you don't invest all your liquid assets in house equity (essentially becoming "house poor"). As a new homeowner myself, I spent in excess of 20k USD in the first year on maintenance and emergency expenditures related to the house.

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After further research, I discovered this is possible, but not easy. I found a way, but only one mortgage company agreed to it. The scheme is as follows. My parents give me a "gift" to help me with the initial 25k down payment. I tell my parents that I will pay them back eventually, but there's no timeline and it's not an official loan. I give the seller a check for 25k on auction day. At closing, the mortgage company gives me a mortgage loan for 97% of the sale price (3% down). Since I already paid the seller 25k (more than 3%), the mortgage company cuts two checks: one to the seller for the sale price minus 25k, and one to me for 25k minus 3% of the sale price. After closing, I effectively only paid 3% down (plus closing costs). With the check I get at closing, I can re-pay the "gift" that my parents gave me.

Only one mortgage company agreed to this scheme; three others said they wouldn't be able increase the mortgage amount to 97% at closing if I already paid the seller 25k. So, it's possible, but limits my mortgage company choices. Incidentally, the one mortgage company that agreed to this also had the highest interest rate.

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    This bank basically told you to lie? That’s what it sounds like. I am not judging, just employing the Duck Postulate.
    – JTP - Apologise to Monica ♦
    Commented Mar 20, 2019 at 18:43
  • You might want to go to the companies with lower interest rates that refused this scheme and ask them whether they'd be willing to have your parents co-sign the loan instead.
    – Acccumulation
    Commented Mar 21, 2019 at 14:53

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