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  • Property-a-holics

    Funding Property Deposits

    I need some clarity on the following:
    Other than equity release and gifts from family, what form of deposit financing is currently acceptable to lenders?
    There seems to be a ‘proof of funds’ requirement; If there is then how does that affect a joint venture where one person provides funds for the deposit while the other sources and renovates the property? How do I legally structure this?
    What’s throwing me is the “no third party deposit lending” comments I have read. How does this relate to a JV where the deposit is coming from your JV partner - are they considered the ‘third party’?
    Thanks.
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    Marcus, this is a bit of a grey area. The really simple thing to do is to ask the lender you are thinking of going with if they would accept the deposit in that format. You broker can ask his BDM to pose the question for you.
    It goes without saying that you MUST have your agreement with your JV partner in writing. Speak to a solicitor about the best way of drawing your agreement up. I would imagine it would be a fairly straight forward "Deed of Trust" between the two parties.
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    Grey area - that's a relief I thought I was losing it. Something I thought was so simple suddenly - when I looked at the conflicting advice - turned into a headache. Drawing up a DOT is reasonably straight forward so I am happy to go down this route. I also have a JV template that I could use so I will have to investigate that further - seek legal opinion.
    This being a grey area does surprise me. If I were to set up an LTD company with one other person and that person invested funds, for deposits, I don't think this is seen as an issue. Be interesting to hear the opinion of an accountant.
    Thanks for that.
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    The topic is not that gray. It just needs a spotlight to make it clearer.
    1. The funds from the JV partner has to take some legal form. Are they going to have a charge on the property? Are they going to be on the title with you as the person doing the work? Are they making a loan and securing it against something other than the property?
    Think of it this way. You have some nasty event happen so you are no longer on the planet. How does the JV partner get their money back out? If they had to go to the person handling the estate how would they show they had put money into the deal thru some means?
    2. If they lender does not allow someone to borrow the funds they are saying you can not borrow the funds. If you are partnering with someone else (the JV partner) then their funds can be considered equity and not a loan if that is how the funds are put into the deal. There should not be a loan agreement. They should not have any priority over your position in terms of a more senior debt instrument. You can have an operating agreement that they are paid back their initial funds before you split (in some fashion) the profits from the deal
    The lender wants to know there is real cash there and there is no pressure from debt service above the lender's loan that causes you to get into a cash flow bind. If there was a loan then the added debt service could impair your ability to stay current with the monthly payments. That would materially change the risk of the loan so the lender would change the approval process.
    John Corey
    https://www.ChelseaPrivateEquity.com/blog
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    Thank you for being so thorough with your answer, it really helped clarify matters.
    Best wishes
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    Hi Marcus,
    Every UK BTL lender requries that the borrower has at least a 25% cash deposit. If that deposit is supplied by a 3rd party, you should disclose this to the lender (there will be a section on the Mortgage Application titled "Source of Deposit", or words to that effect).
    The lender will (usually) ask for written confirmation from the 3rd party that the deposit funds are an outright gift (i.e. are not repayable by the borrower to the 3rd party). This will usually satisfy the lender, unless there is a reason to suspect that there is something amiss (e.g. if this is your 6th BTL mortgage and your unrelated friend has provided 6 x £25k cash deposits to you as a gift ... an underwriter may reasonably ask further questions!).
    But, a family member providing the funds as a gift is perfectly acceptable to lenders. You may of course still need to provide a bank statement showing that the funds are available. As you have disclosed the arrangement to the lender, you don't need to have the funds transferred to you to do this.
    The lender won't ask your friend / family member where the deposit funds came from, so they could always borrow the cash, gift it to you, and sign off that the cash is a gift. You may, or may not, decide after the purchase that the gift was too generous, and that you want to repay your friend ....
    Hope that helps.
    Steve
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    Stephen Fay FCA
    www.fyldetaxaccountants.co.uk
    'The Property Tax Specialists'
    The quality of posts on here is amazing. I'm chuffed!
    Thanks for that Stephen, greatly appreciated.
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