Vail Daily column: How can a family member help another buy a home
There are a lot of urban myths and rumors out there when it comes to getting your rich uncle (or other family member) to help you qualify for a mortgage loan to buy a home. There are also a lot of confusing rules from the three sources most of the mortgage money comes from (Fannie Mae, Freddie Mac and the Federal Housing Administration). A family member who helps the primary borrower qualify for a mortgage but does not intend to occupy the home is known as a non-occupant co-borrower. Typically, parents are the ones, but I have also worked with siblings helping each other or, in one case, a client really did have a really rich uncle to help him out.
The requirements are different for the down payment source as well as the income stream source for a loan with a non-occupant co-borrower.
When it comes to down payment, Fannie and Freddie require the occupying borrower have some skin in the game. If the down payment is less than 20 percent, then least five percent of the down payment needs to come from the borrowers own seasoned funds. Seasoned funds mean the money must show in the borrowers account for at least sixty days. Anything over that amount must be in the form of a gift, and the donor must be a family member or be able to show a long-standing relationship such as a godparent or employer. If your rich uncle is feeling really flush and gives you the 20 percent, then all of it can be a gift.
FHA on the other hand allows 100 percent of the down payment to be a gift.
The most lenient in for qualifying income is an FHA loan as well. With FHA, we look at one combined bucket of income and expenses between all the borrowers. If the combined income of the parties vs. their combined expenses meets the requirements, then we’re usually good as long as both parties have good credit and the minimum 3 percent down.
Fannie and Freddie have a different take on these loans. Generally, the occupying borrower will have to qualify for the majority off the monthly payment on his own, but if he is a few bucks short then the income of the family member can help put him over the top.
There are some significant differences between a FHA and a Fannie or Freddie loan as well. One of the most important ones for loans like these is, in Eagle County, there are not currently any FHA approved condos. As that is where the lower price point is for housing, condos are often the first properties considered by younger buyers. Getting a condo FHA approved is a long process and must be renewed every few years and the cost is several thousand dollars initially. Further, FHA will not accept loans on deed restricted housing. Thus borrowers are limited to Fannie or Freddie loans on condos in the area.
However, FHA loans are available on a townhome or duplex. The difference between a townhome and a condo is that in a townhome or duplex vs. a condo is that you own the land under the unit, in a condo you own the airspace.
FHA loans also have a hefty mortgage insurance premium, including both a monthly and one time upfront fee. Fannie and Freddie loans with less than a 20 percent down payment require mortgage insurance as well, but only a lower monthly fee than FHA and no upfront fees.
It is also important that the non-occupant co-borrower fully understand that if the borrower defaults, then the late payment will show up on the credit reports and that he is fully liable for the amount borrowed. If there is a foreclosure, then it will have an equal impact on both parties credit rating and the impact can be far reaching. Borrowers, even non-occupant co-borrowers, who are involved in a default or foreclosure on a mortgage may be unable to get a new mortgage or even a refinance on their current home loans for up to five years.
The non-occupant borrower needs to evaluate the borrowers resources and ability to make the payments as well. For example, what would happen if the primary borrower were unemployed, or became ill for an extended period and could not work. Is the co-borrower able and willing to step up and help with the payments? These arrangements can be a great gift to helping a family member get some traction on the road of homeownership, and be rewarding for both parties, if they work out. It can also be a very stressful experience if things go wrong.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtn mortgageguy.com.
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