June 11th, 2019 2:32 PM by Jackie A. Graves, President
For those buying their first home, the single biggest challenge
is coming up with needed funds for a down payment, closing costs and cash
reserves. One of the primary reasons FHA loans are so popular with first time
buyers is the low down payment of only 3.5 percent. Of that, the 3.5 percent
can be a financial gift from a family member. FHA loans are also a bit more
lenient as it relates to credit qualifying. Sometimes though that’s not enough
Sometimes first time buyers don’t yet have enough income to
qualify for a mortgage. This is common when someone first gets out of school
and has yet to find a permanent job or the entry-level job doesn’t pay enough.
When that happens, the would-be buyers would either have to wait, save up more
money or get someone to co-sign the note.
When co-signing, it needs to be clear to those helping out that
the payment history on the new mortgage will be reflected on their own credit
report along with the buyers. If payments are made on time, or at minimum no
more than 30 days past the due date, a positive entry on both credit reports
will be logged. This will raise credit scores for all involved. Conversely,
should there be a late payment made more than 30 days past the due date, that
negative mark will show up on both credit reports and drive down scores. This
can happen without the knowledge of the co-signers until its too late.
Co-signing also hits both parties with the same debt. If the
total monthly mortgage payment is $2,000, then both the primary borrowers and
the co-signers can expect the monthly debt to appear on a credit report. This
could potentially affect the ability of the co-signer to take on new debt such
as qualifying for a new mortgage to buy a home or even when refinancing.
Deciding to co-sign demands some serious consideration.
As it relates to funds needed to close, family members can
provide financial assistance in the form of a gift. This is common when parents
want to help their kids buy a home. Parents can give the needed funds to close
on a home with no expectation or requirement to be paid back. Gift funds must
be accompanied by a letter stating as much along with a solid paper trail of
where the funds came from and their ultimate delivery. Parents can decide to
provide a certain amount up to and including needed funds to close on a
Funds can also be provided to pay off outstanding debt of the
primary borrowers. Perhaps paying off an automobile loan or student loan. In
doing so, monthly debt ratios will be reduced enabling the buyers to qualify
for the mortgage they want. A family member might also agree to provide a
second mortgage on a property. Borrowing from a family member means making sure
the note is valid in the state its executed and properly spells out the terms
of the note. The first lien lender will also want to take a look at the new
second lien note to make sure it complies with state law and indeed
subordinates to the new first lien.
Co-signing is one of the more common ways family members can
help first timers buy a home but they can also help in other ways that doesn’t
obligate the parents to be a responsible backup to more debt.
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