Can I borrow from a friend to buy a house?

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A smart homebuyer recently used our Ask a Lender feature to ask an interesting question.

I’m buying a home with a friends cash (borrowed on a note) to remove the financing piece from our offer. How can I work with a lender in advance to secure refinancing after close? I’ll need to refinance the home to pay off my friend’s note. Can I do it without doing a cash-out refi? Another question would be, what is the best way to avoid doing 2 appraisals? One during the initial purchase, and one for the refi?

This got us thinking. If you are buying in a competitive market (e.g. Denver, SF, NYC) you have probably lost out on a home purchase to an all-cash offer. Sellers love cash offers because they don’t have to worry about the appraisal and a buyer qualifying for a mortgage. Cash buyers have a leg up and they can move fast.

If you are like most of us, you think, “who has $300,000 sitting around for a home?” Apparently, a lot of people do. According to CoreLogic, over 30% of all transactions are all cash. Three out of ten transactions is not insignificant, but does everyone really have the cash?

It turns out, there is a strategy for making a cash offer, even if you don’t have the cash. But, you do need to know someone with some spare change. Here’s how it would work for a $300,000 house, assuming you have enough cash on hand for the 20% down payment ($60,000).

  1. Reach an agreement with a friend to borrow $240,000. It’s important to formalize this in a legal document or a formal “note.”
  2. Purchase desired house for $300,000 (your $60,000 + borrowed $240,000). No mortgage involved!
  3. Find a mortgage lender and re-finance the property and pull out $400,000 of equity
  4. Pay off the loan from the friend
  5. Begin payments on your mortgage

There are lots to consider if you are going down this road. The amazing lenders Maxwell works with came through with fantastic responses. We’ve included them below (view on Maxwell). Do you have any questions you’d like answered by a loan officer? Feel free to ask a lender using Maxwell.

Lender 1

Hello, you can get pre-qualified for the cash-out refinance and yes, it would have to be a cash-out if you want to be able to pay your friend back. A cash purchase does not require an appraisal so you would only need one appraisal for the refinance. Hope that helps!

Lender 2

The note needs to be recorded by the title company at the time of closing and placed against the house. Then when the refinance comes into play you are just paying off the recorded note and therefore it would not be a cash out refinance. There is no way to get around the appraisal issue for the refinance, unless perhaps the file is opened without any income information and an appraisal ordered that way by the lender. Then the refinance completed within 90 days of the appraisal would probably work.

Lender 3

These are good questions. I would consider having a note filed for the funds being used to pay cash for the house as this could allow the refinance to be a rate and term refinance if done right, instead of a cashout refinance. It is possible to go ahead and have your credit, income, and assets approved up front so that after you buy the house you can move as quickly as possible on the refinance part of it. It is possible to go ahead and have an appraisal ordered through the lender, depending on what loan type you go with, that is good for 120 days. This could then be used to make sure you are getting a market value now for closing and be able to then be used for the refinance. Another option is your friend could pay cash for the home and you could then purchase it from your friend for cash. This may be an easier way to do it depending on what you are trying to accomplish. I would be happy to go over this with you in more detail.

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