The down payment is the biggest barrier for most real estate investors to scale their portfolio — or even enter the game in the first place. Whereas homeowners can acquire a primary residence with less than 5% down in many cases, investors have historically counted themselves lucky to face a down payment south of 20%.
This is a lot of money to come up with. Even prolific and wealthy investors can quickly run out of dry powder to tie up in down payments — especially if they wisely want to maintain some liquidity.
Add to that rising property prices, tightening credit, and stricter documentation requirements, and many investors find their growth coming to a halt. The result — waiting years or even decades for return of capital, or seeking passive investors and accepting a fraction of the equity for the same amount of work.
The situation cries out for some sort of down payment assistance strategy to help successful real estate investors scale. A business working capital loan might seem like a viable strategy to fund more down payments, but most real estate investment lenders have refused to accept borrowed funds as down payments in the past.
But that tradition has been softening. Certain DSCR and hard money lenders have become more open to accepting borrowed funds as down payment on investment properties. Munoz Ghezlan has been carefully compiling such lenders as well as their lending profiles, and using that information to help investors fund their down payments.
With the help of firms like Munoz Ghezlan Capital, using business WC for down payment assistance has become a viable strategy for real estate investors to get their start and help.
Key Takeaways
- Grant-based down payment assistance is usually only available for primary residences, not investment properties. The primary form of down payment assistance for investors is loans.
- Lenders have historically been reluctant to accept borrowed funds as down payment, but certain lenders — particularly DSCR lenders — have relaxed those standards in recent years, making it very doable to make a down payment with borrowed funds.
- Business working capital loans are an attractive source of investor down payment loans, especially for experienced investors but even for newer investors with a business entity, revenue, and good credit.
- Risks of down payment assistance loans include overleverage, cash flow considerations, and compliance with borrowed-funds and seasoning requirements.
Understanding Down Payment Requirements for Investment Properties
To understand the challenge of obtaining down payment assistance for investors, let’s revisit the first principles of down payments — both in general and for real estate investment loans specifically.
Why lenders require down payments
Lenders require down payments for three primary reasons, both of which relate to risk mitigation for the lender:
- Prevent the Risk of an “Upside-Down” Foreclosure. Real estate values have historically gone up over time, but market corrections do happen. For example, during COVID national housing prices dipped 5-8% overall, with overheated markets like Austin dipping as much as 23%. If the lender ultimately has to foreclose, they don’t want to be in the position of owning property that is worth less than the outstanding loan balance and having to liquidate the asset at a loss. This is why they set “loan-to-value” maximums — to help ensure that any property they repossess will sell at a profit or at least break even.
- Require the Borrower to Have “Skin In The Game.” If a borrower finances the acquisition with very little of their own capital committed, this makes the deal much easier for the borrower to walk away if the investment underperforms. The borrower’s credit might be severely impacted by a foreclosure or deed in lieu, but at least their capital reserves don’t get depleted, leaving them with other options to move forward. By requiring the borrower to make a significant capital investment in the deal up front, lenders reason that the borrower will make every effort to salvage the deal. Otherwise, their upfront commitment of capital is a total loss. Requiring a down payment adds security to the lender that the buyer is not using the excuse of “other peoples’ money” to be careless.
- Risk of Over-Leverage. If a buyer takes on extra debt, particularly unsecured debt that the mortgage lender has no control over, it can be very easy for the property’s cash flow to get out of control, leaving the borrower overextended and at risk of default on all debt service.
Standard lender expectations for investment properties in 2025
LTV standards shift with the market, but in general we can always expect investment down payments to be higher than homeownership down payments.
This is because people tend to go to great lengths and make significant sacrifices to keep their primary residence — their “family home.”
An underperforming investment property, on the other hand, is easier to walk away from. The investor risks damage to his/her credit, but at least they will not be homeless. The investor might come to the conclusion that it is better to preserve their dry powder and live to fight another day.
For this reason, investment lenders require hefty down payments to make sure the investor has a great deal of “skin in the game” — more than they can easily justify as a total loss — and to make increase the likelihood that if foreclosure does happen, the lender will acquire a property of a value equal to or greater than the outstanding loan balance.
In general, here are the down payment/LTV ranges we see for the most common types of investment property mortgage loans:
- Conventional/Conforming Investment Loan — 15-25% down, 75-85% LTV
- DSCR Loan — 20-30% down, 70-80% LTV
- Hard Money Loan — 10-20% down, 80-90% LTV
Restrictions against using borrowed funds for down payments
We now arrive at a key hurdle investors must clear in pursuit of down payment assistance — the restriction against using borrowed funds for real estate down payments. Many lenders include rules in their mortgage contracts that forbid borrowers from using borrowed funds as a down payment source.
Investor down payment loans do protect the lender from an upside-down foreclosure, but it does not mean the investor has “skin in the game.” After all, they’re not committing their own capital — it’s still “other peoples’ money.” The borrower also takes on the risk of being over-leveraged — in fact, even more so if the debt is higher-interest and shorter term with higher monthly payments putting pressure on the cash flow.
The “Seasoning Requirement”
Borrowers will be required to submit several month’s worth of bank statements — usually 3 months for conforming loans, at least one month for DSCR down payment loans — showing the funds for the down payment in the account. This acts as evidence that the funds were not proceeds of a loan. This is called the “seasoning requirement” — the funds have to have spent some time in the account, indicating that the buyer had the funds on hand without the need for an outside loan.
However, the seasoning requirement does not mean that the borrower is allowed to take out a loan, leave the proceeds in a bank account for three months, and then use the funds as a down payment. If the restriction is in the contract, seasoning borrowed funds is still a violation.
The seasoning requirement is just one facet of the lender’s due diligence. Lenders have many other avenues of investigation to discover whether the borrower recently took out a loan and is trying to pass borrowed funds off as non-borrowed funds.
Consequences of violating the borrowed-funds restriction
Attempting to disguise loan proceeds as savings for the purpose of down payment has serious consequences. If the lender discovers the deception (and the chances are excellent they will), they will certainly reject the loan application, and the applicant may even be held criminally liable for attempted mortgage fraud.
Does this mean that it is impossible to use borrowed funds as a down payment on an investment property?
In the past, it was very difficult. However, it has become more and more possible. Certain lenders have relaxed their restrictions on use of investor down payment loans.
It varies from lender to lender based on their risk tolerance, as well as the characteristics and quality of the deal. It also plays a role in their risk assessment, so use of borrowed funds may result in lower LTV, higher interest rates, and other risk-mitigation terms. Some loan products will simply never allow borrowed funds as down payment (i.e. QM loans that conform to Fannie/Freddie guidelines).
However, with the right lender and product, you can use borrowed funds as a down payment. Even if the borrower has less skin in the game and might become over-leveraged, the lender’s risk risk is still somewhat managed because they have reduced the chance that they will foreclose on an upside-down property.
Munoz Ghezlan Capital has spent years tracking the underwriting requirements of various lenders so we can match investors with the lenders best suited to their goals — up to and including down payment assistance for investors.
Which loan types prohibit borrowed down payments vs. allow them
The following is a brief list of the different categories of real estate lenders that can be expected to allow borrowers to use investor down payment loans, vs. lenders that prohibit them on a blanket basis.
- Conventional/Conforming Loans: very limited, strict sourcing rules
- FHA/VA: not available for investment purchases
- DSCR: more flexible, but funds must be seasoned or properly documented
- Hard Money: most flexible — will often allow borrowed funds
What Counts as “Down Payment Assistance” for Investors?
Various down payment grants and loan programs exist to help consumers become homeowners. However, for investors, “down payment assistance” will almost always take the form of a separate loan, often of a different character and with different terms than the primary mortgage financing.
Loans that can potentially be used as down payment assistance for investors (provided that the lender will accept such an arrangement), include:
- Business working capital loans - short-term or medium-term loans, often unsecured, available to business owners to cover operating expenses, marketing, payroll, or deal-specific expenses.
- Lines of credit (business or personal) - revolving credit lines, including credit cards, that you can borrow against up to a certain limit and only pay interest on balances you carry.
- HELOC/HLOC - a revolving line of credit secured by real estate equity — often the borrower’s primary residence but can be secured by investment real estate too.
- Gap funding - short-term loans available to help cover the difference between available cash and deal costs.
- Private money loans - loans from individuals, small groups, or family offices rather than from banks or financial institutions.
- Partner capital - a joint venture with a “money partner” who contributes the capital needed to close the deal.
- Cross-collateralization - loans that use multiple real estate assets as collateral for a single loan.
Business Working Capital Loans as Down Payment Funding
One of the key strategies Munoz Ghezlan Capital facilitates is the acquisition of investment property with a business working capital (WC) loan as an investor down payment loan.
What working capital loans are
Working capital loans are loans available to business owners to act as working capital. Companies use these loans to cover operating expenses, marketing, payroll, or major initiatives.
These loans are often unsecured, meaning there is no collateral. They are based on the time in business, revenue, and creditworthiness of the business, not the security of collateral (though lenders can often attach assets in judgments against borrowers in default). This means that in the event of delinquency, the lender cannot immediately initiate a relatively simple judicial foreclosure proceeding.
Characteristics of these loans include:
- Term loans with 2-7 year terms, though some short-term working capital loans have terms of 6-24 months.
- Funding ranging from $50,000 to as much as $500,000 and beyond.
- Fast underwriting and funding, with funds wired in as little as 5-10 business days and sometimes and some rushed processes available in as little as 24-48 hours.
- Monthly payments with interest rates between 6-12% for well-qualified borrowers (10-25% or higher for less qualified borrowers).
NOTE: Some short-term working capital loans are factor-rate loans, where you owe a percentage of the loan balance as the cost of borrowing regardless of how long you hold the loan. These types of loans can require weekly or even daily ACH draws, which can be very hard on cash flow. Munoz Ghezlan Capital strongly prefers longer-term loans based on APR, where cash flow is preserved and early payoff can result in a far lower cost of borrowing.
Why these loans are increasingly used for down payments in 2025
Working capital loans have become popular as down payment assistance loans for real estate investors since DSCR lenders (conventional but non-conforming rental property investment mortgages) became more lenient in allowing the use of borrowed funds as down payments.
This leniency is not without stipulations, of course. To qualify for most DSCR loans, investor down payment loans must be:
- Funded with cash in the business bank account
- Clearly documented
- Debt service on the loan will be factored into debt service coverage ratio (DSCR) calculations
Certain private money lenders and hard money lenders have long been open to using WC for down payment funding.
Approval requirements investors should expect in 2025
Approval requirements change over time. For 2025 and going into 2026, here’s what to expect in order to clear underwriting for a business working capital term loan:
- Minimum personal credit score of 600-660, with better terms available for higher credit profiles.
- 3-6 months of business bank statements.
- Valid business entity (LLC, corporation, etc.) in good standing.
- For revenue-based loan products, revenue minimums in the range of $15,000-$30,000 annually.
- Time in business — 2 years (can be as little as 6-12 months depending on the lender).
Structuring the loan correctly to use for a down payment
To be use WC for down payment effectively, a working capital loan must:
- Fund into a business bank account, with no comingling of the proceeds with personal funds.
- Properly documented with an impeccable paper trail.
- Aligned in its repayment schedule to the exit strategy (sale, refinance, etc.)
Risks and mistakes investors must avoid
As attractive as the prospect of borrowing down payment funds may be, investors must be aware of the potential risks and pitfalls of this strategy:
- Overleverage. Buying property with 100% borrowed funds creates the risk of the monthly payments overtaking net operating income, leaving the investor with a shortfall to cover to avoid foreclosure.
- Short-Term Loans for Long-Term Holds. If the investor intends to hold the property beyond the term of the working capital loan, he needs a plan to refinance or otherwise retire that loan.
- Neglecting the Seasoning Requirements. While working capital loans can fund quickly, that doesn’t mean you can borrow down payment funds last-minute. Many investment lenders require that the funds be seasoned for a certain period of time, meaning the deal horizon window must match the seasoning requirement or the funds must be secured in advance of even identifying the deal.
- Not Accounting for Repayment when Calculating DSCR. Many investors are accustomed to calculating debt service coverage ratio (DSCR) based on the balance of the DSCR loan, but the DSCR must be calculated based on all debt service, including the DSCR down payment loan. That is what the lender will consider, armed with the requirement of your full disclosure of the source of down payment funds, and failing to do so could result in a decline from the DSCR lender.
Alternative Down Payment Assistance Sources Investors Use in 2025
While working capital loans are a favorite source of down payment assistance for the clients of Munoz Ghezlan Capital, they are not the only available source. Here is a quick rundown of some alternative sources of financing for down payment assistance.
Gap funding lenders (transactional, bridge, or specialized)
Various forms of “gap funding” exist to cover the difference between available capital and the purchase price. These include:
- Transactional Funding. Transactional funding is a form of short-term loan used to fund the wholesaler’s end of a double closing. However, since transactional loans must be repaid on the same day in which they fund, they make a poor match as an investor down payment loan.
- Bridge Loan. Bridge loans are short-term loans designed to finance rehabilitation, renovation, and repositioning of distressed property. Bridge loans may serve to close the gap in funding needed for the down payment, though their primary purpose is to finance repairs and renovation in preparation for long-term refinance.
Other forms of specialized gap funding may be available for certain real estate investments, which Munoz Ghezlan sometimes helps investors identify.
Private money loans
Private money loans distinguish themselves in having very few rules or guidelines. They are issued by private individuals, family offices, or small groups of investors with money to lend. The terms can be whatever the borrower and lender agree upon, and they tend to be based on relationships and trust.
HELOCs and home equity investment products
Home equity lines of credit (HELOC) and similar products create revolving lines of credit with real estate as the collateral, just as with a mortgage. A large-enough line of credit can finance a down payment, but beware that the funds might need to be in the business bank account long enough to meet the seasoning requirement, and they tend to carry high interest rates on balances carried. A HELOC or HLOC also puts the collateralized real estate at risk.
Cross-collateral and “pledged equity”
A cross-collateralized loan is a loan that uses the equity in multiple real assets owned by the borrower as security for a loan. This contrasts with a normal mortgage, which only uses one property as collateral. This may be an option for investors with significant equity in multiple properties, but it has the downside of putting all attached properties at risk.
“Pledged equity” is similar in that it uses equity in another property as extra collateral for a loan against another property.
Credit cards / 0% APR offers
Amazingly, many real estate investors use credit cards as a source of funding for down payments. What are they, after all, but unsecured revolving lines of credit? Most credit cards are limited in their cash advance limits and carry ultra-high interest rates on cash advances. However, credit card limits can be turned into cash through various back-door methods with lower interest rates.
Small business and enterprise credit cards often have high-enough credit limits to make a big dent in — or even cover the entire cost — of a down payment on a smaller property. However, seasoning requirements still apply.
Even if it’s not a cash advance, the interest rates on many credit cards are perilously high. However, some credit cards come with promotional offers that offer 6-18 months of 0% APR. However, it is important to have a plan to refinance and pay down this debt within the proportional 0% period. If the 0%-interest promotional period elapses, all interest will be retroactively applied to the balance, effectively erasing the interest savings.
Advantages and Disadvantages of Using Borrowed Down Payments for Investment Properties
Pros
- Opportunity to acquire investment real estate with little or no down payment and rapidly scale.
- Potential to refinance after repositioning into lower-interest long-term debt.
Cons
- Not all lenders will allow borrowed funds to be used as down payment.
- Potential for over-leverage.
- Affects DSCR calculations.
How to Evaluate If This Strategy Makes Sense for You
Due to the risks involved, it is important to consider whether the strategy of taking on extra loans as down payment assistance makes sense for your investment. Deciding factors that should be evaluated include:
- Risk Tolerance. The more leverage involved in a deal, the riskier it is. This strategy may only be appropriate for risk-on investors, possibly with significant equity in other deals and a track record of success with similar deals.
- Cash Flow Forecasts. A 3-year term is very different than a 30-year term, and interest rates can be higher on unsecured debt. This results in higher short-term debt service, which can easily flip cash flow to the red unless the deal is very favorable to the investor. Pay careful attention to whether the forecasts of cash flow justify the debt service. Any real estate investment that carries negative cash flow is inherently risky.
- Investment Time Horizon. Do you have an exit strategy — sale, refinance, etc. — that will allow you to close out the down payment assistance debt before it matures or comes due.
- Sensitivity Testing. Test your projections against worst-case scenarios — market corrections, interest rate adjustments, refinance expectations, etc.
Bottom Line
Down payment assistance loans for real estate investors are a relatively new development. Relaxing of standards by DSCR lenders have opened up down payment assistance loans as an avenue for scaling a property portfolio, even for investors who want to preserve their capital.
Working capital loans represent a particularly attractive source of down payment funding with the right lender considering that they are often unsecured and have longer terms than other sources of borrowed down payment funds.
Such a strategy carries with it the risk of overleverage, cash flow pressure, and loans coming due before exit. However, with careful due diligence, down payment assistance loans can be a major component of a rapid expansion strategy for real estate investors who have legacy on their mind.
If this strategy appeals to you, schedule a free strategy session with a Munoz Ghezlan Capital expert. We can connect you to the right lenders for both the mortgage and the down payment assistance, and help you assess whether this strategy is right for you, how to comply with seasoning requirements, and set your deal up for success.
