We talk to folks who don’t have quite enough money saved up for a down payment on their dream home, and they want to “Borrow” the money from their Family. Borrowing from the “Bank of Mom and Dad” sounds like a great idea, but in reality, you can’t do that. Here’s some good information on how to get money to buy a home.
It’s also a “no-no” to borrow the money for the down payment from your credit cards. But wait! Maybe you “know someone, who knows someone who actually did this.”
With the case of Family – you can easily get a GIFT for the down payment or closing costs and obtain FHA or Conventional financing. However, the family member giving the gift must state, in writing, that the gift does not have to be paid back. If, out of the goodness and kindness of your heart – you DECIDE to pay the money back, that’s besides the fact. The important thing is that there’s not a “second mortgage” made with your parents holding the note.
If you want to use “Family Money” to cover the closing costs for a USDA home loan, or a Veteran’s Home Loan– that’s cool too! Neither one of these programs require a down payment. Remember though, same rules apply – it must be a GIFT.
How to Get Money to Buy a Home – Using Your Credit Cards:
If the credit card “hat trick” is what you are going for – remember that you will be asked to submit 2 months of bank statements when you apply for a mortgage… if there’s a large deposit on those statements, we are required to prove where that money came from. Since “credit card” is not one of the sources you can use for a down payment – well, that could be an issue. If you know someone who used their credit card to get their down payment, it is possible that this “friend” put the money in their account well BEFORE they applied for a mortgage.
Another Tripping Point
When parents provide a gift with Conventional, FHA, USDA or VA Home Loan financing, they need to be prepared to provide documentation of where the funds came from. They will sign a gift letter and provide a recent bank statement showing that the funds are/were available to give to you. There also needs to be a “paper trail” documenting the transfer of the gift funds (photo copy EVERYTHING–you’re better off having too much paper work to provide your mortgage originator than not enough).
The tripping point comes when a parent doesn’t WANT to let us see that they have enough money in the bank to cover it. This is a non-negotiable deal. If we are presenting this as a Gift – it MUST BE DOCUMENTED (period, end of story). The other option, is to get the gift funds deposited WELL before you make loan application.
Often times when gifts from family members are involved, borrowers opt to use FHA financing since the guidelines are flexible with regards to gifts. With FHA, a gift from a family member can go towards down payment or closing costs. With Conventional Financing, there’s a requirement that you have at least 1 months total payment in reserve. So, FHA has 3.5% down payment requirement – Conventional requires a 3% down payment, plus one month’s reserve.
Because FHA’s PMI has gone up recently – the comparison between the Conventional PMI and the FHA PMI is insignificant. They are about the same. The BIG difference is in “risk level pricing” for a Conventional loan. If the borrowers have credit scores in the 700’s. Then, it might be better to get the gift from your folks, make a 3% down payment. If the credit scores for the loan are in the “MINIMUM” credit score range – let’s say 645 for a middle score – the Conventional Loan interest rate is going to be Significantly higher (Maybe as much as 1.25% higher than a FHA loan).
CASH ON HAND
We’ve had borrowers come to us in the past who just happened to have $3000 in cash, at their house, in a safe deposit box, wherever, that they wanted to use for a down payment on a home. They didn’t want to put it in a bank… in one case, because of their ethnic and historical distrust for banks, we were able to show where they had legitimately been making contributions to their Parrish. The Parrish gave them the money for the down payment. We documented their contributions, and it worked. In general, however, it is almost impossible to use large chunks of cash that you just “have” – that are not on deposit, and “seasoned” been in the bank for more than 60 days.
If you are looking for low down payment options – and for whatever reason, the folks you just talked to said you’ll never be able to get a mortgage the way you want to… call us. We know all of the programs, we know how to get money to buy a home! We do USDA Home Loans, NC Housing Financing, FHA, Veteran’s Home Loans – the whole gambit. We can help, and we’ll give you straight up answers. Steve and Eleanor Thorne, 919 649 5058, we have the best rates – and we know the mortgage business!