Anya Martin for the Wall St Journal writes: Having trouble making that down payment? Call your
mother. Maybe she and dad can help.
Financial experts say that parental help is best when
the money is a gift, with no expectation of repayment. That is because loans
from family members can create extra hurdles when a home buyer applies for a
mortgage.
Lenders typically view a family loan as another burden
that could affect a borrower's ability to make monthly payments, said Tom Wind,
executive vice president of residential and commercial lending at national
lender EverBank EVER +0.26%. In
fact, a loan from a parent could raise a borrower's debt-to-income ratio
sufficiently to result in disqualification for a mortgage, he added.
Parental loans also fall under the category of unsecured
debt, meaning that no asset is acting as collateral, which can pose a lending
risk. Edward J. Achtner, Bank of America's BAC +2.34%senior
vice president in north California and Oregon, said his company generally
doesn't allow unsecured debt—such as credit-card advances—as a funding source
for a jumbo mortgage down payment, Mr. Achtner said. To be considered, a loan
from a relative would have to be secured with collateral such as a traditional
secondary mortgage, counted toward the maximum loan-to-value ratio, and included
in the underwriting process, he said.
Gifts—with no strings attached—are a different matter.
Even then, EverBank and other lenders typically like to see home buyers
contribute at least 10% of the loan amount to the down payment. "We are looking
for borrowers to have their own equity in the transaction because that's an
indication of their ability to manage their own finances," Mr. Wind said. "If
someone is coming to the closing with a down payment that is all gift money,
we'd consider it, but only on a case-by-case basis."
Bank of America generally requires borrowers provide at
least 5% of the loan amount, Mr. Achtner said. And gift money is only acceptable
for a down payment on a primary residence and not a second, vacation or
investment home, he added.
In making a family gift, the key is for the borrower to
have the right documentation, including a letter that clearly states the gift
amount and that the gift-giver doesn't expect repayment, Mr. Achtner said. In
addition, lenders require written proof that the money has been transferred from
the relative's bank account to the borrower's bank account or, alternatively,
are given a copy of a certified or cashier's check, he added.
"If one has prepared for the gift correctly, it really
doesn't impair the mortgage process at all," Mr. Achtner said.
About one-fourth of all first-time home buyers receive
some down-payment assistance from relatives, most commonly, parents, according
to a National Association of Realtors survey of people who purchased homes from
July 2011 to June 2012.
Buyers seeking jumbo mortgages—loans above $417,000 in
most parts of the country and $625,500 in high-cost areas—may especially need
the help. Not only is the loan amount higher, jumbos also typically have higher
down-payment requirements—at least 20% of the loan amount.
Rising property values are also driving more parents to
pitch in on down payments, especially in high-price home markets such as parts
of California, Mr. Wind said. "Assuming the borrower can afford the monthly
payment, it's a way for a child to take responsibility but for parents to help
out," he added.
A few more considerations when seeking help making a
down payment:
• Don't forget tax rules. An individual
gift of $13,000 or less is tax-exempt, but gifts that exceed the $13,000 annual
limit must be reported to the IRS. Each parent can give $13,000 to a child and
his or her spouse, for a nontaxable sum of $52,000.
• Stick to close family members.
Lenders generally won't allow down payment gifts from distant relatives or
unrelated parties, such as a builder.
• Gift rules are looser with an FHA
loan.Federal Housing Administration mortgage limits go above regular
jumbo limits in some high-price areas and allow borrowers to use a gift for the
full down payment.
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