Here at RPM, we see a fair amount of high loan-to-value mortgage scenarios – meaning lower down payments with more borrowed from the lender. It’s because the real estate values in our service areas tend to be high and it can take a while for buyers to save the funds needed to purchase a home. So 10% down payments (or even less) are not uncommon and we see them across the borrowing spectrum, from the conforming range (below $417,000) all the way to homes exceeding $1 million. Some buyers also need a boost in their income to be able to meet the debt-to-income ratio requirements to qualify for a loan.
As a result, a common question we hear is; “Is it better to get a down payment gift or use a co-signer?” Not surprisingly, our answer is usually; “It depends.” The two strategies do not have the same solutions and one is usually a better fit than the other. So let’s take a closer look at both options.
Gift funds can sometimes be the easiest and best way to bridge a down payment gap. But there are considerations for both the recipient and donor:
• Usually, the person giving the gift must be a family member, though the FHA does permit employer gifts. If you plan to accept a gift from someone not related by blood (an ex-spouse for example), ask us first if it will work for your type of loan.
• Gifts cannot be a loan, implicit or explicit, so the donor must provide a letter stating that no repayment is expected. They may also be required to show ability to give the gift by showing bank statements.
• There may be tax implications for the person giving the gift, so do them a favor and have them first discuss their intended generosity with their tax professional.
• Some mortgage programs require that the borrower contribute a certain percentage of the down payment (usually 5%), even when a gift is involved.
• Gift funds are rarely allowed on investment home purchases.
• Gift funds typically can’t be used with our REX Homebuyer program, but ask your Loan Advisor for details if you’re considering REX.
Technically speaking, co-signers are Non-Occupant Co-Borrowers – let’s call them NOCBs. This means they will be borrowers on the loan application, but they do not intend to share occupancy of the home with the primary borrower. Use of an additional borrower is most often intended to add income to an applicant’s profile and can negate the need for gift funds. But here’s what you need to know:
• Most importantly, NOCBs cannot be used to strengthen the credit profile of a primary borrower. We will always grade a loan application using the lowest middle FICO score of all borrowers. In short, NOCBs cannot bring the credit score of a file up, but they can bring it down.
• NOCBs can be used to add income and assets, but remember that their debt also gets considered in the overall picture.
• Some mortgage programs require that the primary borrower provide a certain percentage of the income that gets factored into the overall debt ratio.
• Other programs, like FHA and Freddie Mac-backed loans, will allow us to blend ratios, meaning the primary borrower (occupant) could conceivably have no income, while the NOCB does all the qualification heavy-lifting.
• Ideal NOCBs are parents who have passed their peak overhead years, have excellent credit and are not yet retired.
• NOCBs must carefully consider their future borrowing needs since in the eyes of creditors, they will be fully responsible for paying any Note on which they have co-signed.
Gift funds and co-signers can be viable options for buyers who needs assistance with mortgage qualification. If you’re considering exploring one of these routes, it’s important to work with a professional who can examine your specific scenario and help determine your best option. If you’d like to discuss the finer details of either approach, get in touch today.