Parents have been helping their kids buy homes since, I’d guess, kids have been buying homes, but in today’s lending environment, it’s important that both borrowers and real estate professionals avail themselves of the most current options, advantages and guidelines. After all, knowledge is power and there are really only two main approaches, gift funds and co-signing, that come into widespread use when we talk about introducing family help into the mortgage approval process.
Borrowers of all stripes use gift funds and do so far more often than the general public would estimate. But on the other hand, don’t let any preponderance of gift fund use lull you into thinking that there are no restrictions. Indeed, gift funds, for the vast majority of loan programs, MUST come from a family member. So a gift from a friend isn’t really a gift at all and could constitute a source of funds that is not allowed for the buyer. Yes, I realize that FHA loans will allow gifts to come from close relationships other than blood, but remember, I said “vast majority” of programs — not all programs. Gift funds may also be limited to a certain percentage of the overall down payment, within the constraints of the loan structure. So, for example, the buyers themselves may be required to put 5% or 10% of the purchase price into the transaction of their own funds, regardless of the donor’s largesse. We see this with some jumbo loan options. Lastly, gift funds cannot be used for reserves with virtually all lenders and programs.
Cosigners or Cosignors or Co-signers or…
Whereas gift funds will solely help a borrower with the “asset” piece of a qualification — and all approvals are a combination of income, assets and credit — adding a cosigner could potentially help with both the income AND the assets, if necessary. But first, let’s acknowledge that a cosigner is really, in lender-speak, a “non-occupant co-borrower.” This is translated as, “someone who is going on the loan application but who doesn’t plan to live in the home.” Sounds about right for those parents who will participate in the loan process with a child in order to lend both assets (in lieu of a gift) and income (to help with the debt-to-income ratio). Good candidates for non-occupant co-borrowers need not be family, but they should have a very strong debt-to-income profile of their own as they will be parlaying their surplus income to aid the primary borrowers/occupants. And while we’re on the topic of what makes a good cosigner, let’s accept that cosigners cannot be brought onto a loan application to offset a credit challenge from any other borrower on the application. We lenders generally grade the file by the lowest middle FICO score of all applicants. Lastly, non-occupant co-borrowers are permitted on conforming, FHA and even jumbo loan programs (along with others).
Family help with a home purchase goes back generations, but nowadays it can also go forward. A new trend we’re seeing is that of working children gifting and co-signing for their elderly parents. There’s no rule that says when it comes to age, these benefits can only go in one direction. So keep all of these approaches in mind if you seek to help someone close to you purchase his or her home. And if you have questions, let us know. We may not be family but we’ll treat you that way.
Una cosa nostra,
Robert J. Spinosa
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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