June 12th, 2019 8:48 AM by Jackie A. Graves
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
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
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.
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.
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 property.
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.
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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