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My friend wants to buy a house; however he does not have the capital to put twenty percent down because he loaned out his capital as a secured business loan last? year. He thinks all other business loans backing that startup are unsecured and he has the only secured loan but I don't think he actually knows this.

He currently thinks I can loan him the money secured by the first loan so he can put down the twenty percent without impacting the mortgage and so avoid mortgage insurance?

Does this scheme of securing a loan on the proceeds of a secured loan make sense at all or did he make something up?

I am not willing to provide a second loan on the house and assume almost all the default risk.

State is California and I have a hunch it matters.

  • Would you buy your friend's claim against the business outright for the amount of money he thinks it can secure? If you would, offer to do so and not have him as middleman. If not, don't loan him the money. (In fact, don't loan money to friends, period). – Henning Makholm Apr 10 at 0:41
  • @HenningMakholm: While you certainly have a good point, going direct is higher risk than having my friend as a middleman as two incomes have to fail rather than one. – Joshua Apr 10 at 0:45
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    "Don't loan money to friends" still applies. You can give money to a friend if your friendship is close enough that you want to help him out. And if it makes the friend feel better to promise to give you the money back somewhen, then you can let him do so. But in your heart it must be a gift. Perhaps he will eventually gift you a similar amount back. Perhaps not. – Henning Makholm Apr 10 at 0:53
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As part of the loan approval process your friend will have to prove at two different times that they have a plan for the down payment, and they will have to show bank account statements to prove it. They will have to do this when they apply, and just before the settlement date.

If they have a large sum of money being transferred into their bank account, they will have to have the person who is gifting them the money fill out a form saying that the money is a gift and that they don't have to pay it back.

He currently thinks I can loan him the money secured by the first loan so he can put down the twenty percent without impacting the mortgage and so avoid mortgage insurance?

So if you say it is a gift when it is a loan, then you will have to lie on the forms. That can cost you and your friend. He can lose the house, and both of you can be charged with loan fraud.

But if you say it is a loan, then the amount he has to pay you each month will have to be factored into what he can afford each month.

Then you add in the risks about lending to a friend... and the situation becomes risky for you.

  • If the friendship ends and/or the friend decides he values the money more than the friendship, he can use the piece of paper to show that it was a gift and refuse to pay the money back. – stannius Apr 13 at 13:33
  • Do you know, does getting a loan for the down payment make the main mortgage terms worse? I'm guessing not because of the existence of "piggyback" loans to avoid PMI, but, it's also frequently stated that the reason for the 20% down payment requirement is so that the borrower has enough invested in the home to not just walk away. – stannius Apr 13 at 13:35
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Does this scheme of securing a loan on the proceeds of a secured loan make sense at all or did he make something up

Essentially he is saying that he has money and there isn't much risk for you.

Getting the secured loan to start up assigned to you can be done... There is legal paper work that needs to be done.

It still doesn't mean your risk is zero. Number of things can go wrong... It's generally not advisable to loan friends.

Your friend would be lying to Bank about the down payment.

Make the decision of giving loan without factoring his secured loan.

  • So now I'm really curious why this is would require my friend to lie to the bank. – Joshua Apr 10 at 2:14
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    @Joshua Your friend wants you to loan him money for the down payment. That is actually not how that down payment is supposed to work. The idea there is that you provide some of the money for a house yourself and the bank finances the remaining 80%. So he is lying about having 20% down payment at his disposal. – Lucas Raphael Pianegonda Apr 10 at 6:22
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    Securing a loan with a loan is happening more than it's not happening. You person 1 lends money from person 2, to get a loan from the bank, person 1 has the capital. It's his money. He did lend it, but it's his at that moment. It's like lending someone money to buy ice cream. The shop owner doesn't care that you lend the money, and provides you with the ice cream. The part of lending money to anyone is another issue. I wouldn't risk it. – MOTIVECODEX Apr 10 at 8:44

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