Having a parent, grandparent or other family member offer to provide some or all of the down payment money you need to buy a house or to co-sign so you qualify for a mortgage is a nice gesture, but lending experts said it might not be as helpful as one might think.
Rules governing gifts and co-signing are so specific that sometimes such help isn’t really practical.
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Underwriting guidelines pertaining to gifts have always been tough. Direct financial assistance must truly be a gift, not a loan that must be repaid, and that intent must be backed up to the lender’s satisfaction.
Most lenders permit gifts from relatives by blood, marriage or adoption, but, properly documented, the concept of an appropriate donor can extend to a fiance, domestic partner or godparent.
Beyond that circle, a gift still might be permitted if the donor’s relationship to the buyer can be adequately explained. Employers sometimes make home purchase assistance part of an employment package, but this, too, must clearly be an outright gift and the employer cannot put a lien on the property.
Ramez Fahmy, sales manager for MetLife Home Loans in Greenbelt, Md., said the most important factor when purchasing with a gift is proving where the money came from, as well as when and why it was given.
Lenders require a gift letter from the donor stating the amount of the gift, the relationship between the donor and the buyer, and that the money is a true gift with no repayment expected or implied.
With conventional lending, Fahmy said, specific documentation required for each loan is determined by the automatic underwriting system. However, buyers should keep a record of every step involved in receiving the gift, including how it was transferred and the accounts where it originated and was deposited.
He advised buyers to obtain the money as early as possible to allow it to “season” in their bank accounts. Even with a gift letter, lenders might question money that suddenly appears in the account the week before the closing.
“[Federal Housing Administration] loans are particularly strict about proving the chain of custody for gift funds,” he said, “and because of this, cash gifts simply can’t be used with FHA loans.”
Both Fahmy and Lamont Green, branch manager of NFM Inc., a direct lender in Bethesda, said down payment gifts are somewhat limited in their practicality.
Conventional mortgage underwriting currently allows their use only when the down payment equals 20 percent of the purchase price and the buyer is providing 5 percent from his own funds.
Fahmy and Green said buyers often are better off purchasing with an FHA loan, which requires only 3.5 percent down, and, because the FHA also puts no limit on the gift size, the entire down payment can come from a donor. Thus, Green said, an FHA loan would require less borrower cash with or without the use of a gift.
Though they might be able to pitch in on the down payment, a relative or friend will not be much help as a non-occupant co-borrower or co-signer on the mortgage.
Green said that though FHA loans allow a co-borrower to assume the entire burden of providing an acceptable debt-to-income ratio, conventional lenders expect the borrower to carry his own weight.
“The co-borrower might have a large income and zero debt,” he said, “but the borrower is still expected to meet a 43 percent debt-to-income ratio on his own account.” And, he adds, “In the current environment, no co-borrower in the world is going to be able to mitigate a borrower’s bad credit report.”
