Getting a gift or loan for your Down Payment – Good or Bad?

This is a well conversed and debated topic these days due to the fact that many home buyers are scrambling to find money for their down payment. Housing market is really attractive with low mortgage rates but on the other hand home prices are slowly creeping up to pre-recession level in many parts of the country. So many consumers are now jumping in to the bandwagon in buying their new home taking advantage of low rates before prices go up way high. But many realize that they don’t have a lot savings to pay their down payment. Some decides to get help from their friends and families whereas others withdraw from credit card. That’s where this important question pop’s up, is it good to get gift or loan from friends?

I was asked similar question from my friends few weeks ago who was approached by this friend asking for money as gift to pay his down payment. Also yesterday, one of my client told me that he is planning to do balance transfer from a 0% credit card to pay his down payment. I told him that’s its really going to be an issue and it became one as lender didn’t accept that fund. But since he already had enough money to cover his down payment they didn’t consider that amount and he is moving forward with the closing. Anyway, let’s see some pro’s and cons on these two different avenues of getting last minute funds for down payment.

Gift Money
It is not a bad idea to get help from friends and families to pay for your down payment. Nobody will say we cannot take that money but you and your donor should be open for some scrutiny with recent guidelines changes. Lender might want to have a gift statement signed by your donor that the money is gifted to you. They might even want to see your donor’s bank statement where it came from before he donated to you. There is a reason behind it.

Lenders are basically operating under the idea that if your donor actually earned or otherwise owns (rather than borrowed) the cash to make you a gift, then the chances that you’ll be subjected to repayment pressures that disrupt your ability to make your mortgage payment are minimal. To ensure this is the case, lenders ask to see where your donor got the cash — if from the donor’s own accounts, they want the account statement. Not only that, if the money came from a relatively recent deposit to the donor’s account, they might even ask to see documentation of where the funds for that deposit came from (e.g., a paycheck stub, etc.).

Lenders are more cautious these days to cover their base to make sure they follow the guidelines of Fed agencies like Fannie Mae or Freddie Mac to whom they will be selling their loans. They have to adhere to their rules and guidelines if they need to sell the loans to them. That’s why they tighten every hole and make sure the loan is good.

As per tax implications on the gift received, you don’t have to pay any taxes. Gifts are not considered income if comes from the right source and no taxes to be paid by you. Their might be tax implications for the Donor depending on how much was donated. Consult your CPA or tax professional for more details.

Loaned Money
People do weird things when they are in the panic mode. First of all, you should never open any new debt account when you started your loan process until the home closes. It is bad idea. Some lender even run credit report few days before the closing for the underwriters to approve the loan. The reason, it will changes your credit score, your debt-to-income ratio and the reserve cash that you’ve shown as a cushion to make sure you’ll be able to make your mortgage payment even if you have a rough month or so.

It doesn’t mean that you cannot get loan money from your friend or families or even credit card for that matter. Just need to be aware that new debt payment adding to your new mortgage payment goes over the 36% of debt-to-Income ratio. If you are under the limit, you should be alright but you should give proper documentation regarding your loan and payment details to your lender. This loan will also have consequences in your income tax return and you need to show that properly and cannot claim the interest paid. Talk to your CPA or tax professional.

What’s the work around?
If there is a problem, there is always a solution. First, you can get your donation few months before you start your loan processing atleast 2 months in advance. If you are building a new home, plan accordingly and get the donation from your donor 2-3 months in advance to your account. Lender usually don’t ask for details about gift to you account if its more than 2 months. It becomes your money. Also if you getting a loan from friend, get it in advance and have a payment schedule attached to make sure it doesn’t hinder your expected mortgage payment. That way you are prepared for your new monthly payment.

I know it is not easy to save up for down payment in this economic conditions. When you decide to save up and wait for it to grow, rates might go up. It is like catch 22 and we cannot do anything about it. It depends on individual how they want to take the situation and go with their home purchase. I always suggest my clients to don’t time the market, just start planning and start saving for you new home and when the rates are low when you are ready it’s your blessing.

Again, DO NOT OPEN ANY DEBT ACCOUNT WHILE YOUR LOAN IS UNDER PROCESSING.

About Vijaianand Thirnageswaram

I am a Proud Realtor of Texas, trying to guide and help clients to find their dream home and educate them to buy them for right price. I am also a Candidate for CFP who has more financial knowledge which allows me share and educate clients in any financial decision making process.

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