As it’s the Christmas season and families are together, and hopefully feeling good will toward each other, there are likely to be a few conversations about family members helping other family members buy a home next year. There are many ins and outs to such an arrangement; here is a short overview of how this can work.
A family member who helps the primary borrower qualify for a mortgage but does not intend to occupy the home is known as a non-occupant co-borrower. Typically, parents are the ones, but I have also worked with siblings helping each other or, in one case, a client really did have a really rich uncle to help him out.
The requirements are different for the down payment source as well as the income stream source for a loan with a non-occupant co-borrower.
When it comes to down payment, the rules require the occupying borrower have some skin in the game. If the down payment is less than 20 percent, then at least 5 percent of the down needs to come from the borrowers own money.
The definition of what is one’s own money is that the money must show in the borrowers account for at least 60 days, or two account statement cycles. Anything over that amount must be in the form of a gift, and the donor must be a family member or be able to show a longstanding relationship such as a godparent or employer. If your rich uncle is feeling really flush and gives you the 20 percent, then all of it can be a gift. FHA on the other hand allows 100 percent of the down payment to be a gift.
When we have a non-occupying co-borrower we look at one combined bucket of income and expenses between all the borrowers. If the combined income of the parties versus their combined expenses meets the requirements, then we’re usually good as long as both parties have good credit and the minimum 3 percent down.
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However, FHA loans are available on a townhome or duplex. The difference between a townhome and a condo is that in a townhome or duplex versus a condo is that you own the land under the unit — in a condo you own the airspace. The condo complex must be FHA approved, and few around here are, although the process to get a complex FHA approved is not too difficult, but can be time consuming.
FHA loans also have a hefty mortgage insurance premium, including both a monthly and one time upfront fee. Fannie and Freddie loans with less than a 20 percent down payment require mortgage insurance as well, but usually it is a lower monthly fee than FHA and no upfront fees.
It is also important that the non-occupant co-borrower fully understand that if the borrower defaults the late payment will show up on the credit reports and that he or she is fully liable for the amount borrowed. If there is a foreclosure, then it will have an equal impact on both parties’ credit ratings and the impact can be far reaching.
The non-occupant borrower needs to evaluate the borrowers resources and ability to make the payments as well. For example, what would happen if the primary borrower were unemployed, or became ill for an extended period and could not work. Is the co-borrower able and willing to step up and help with the payments?
These arrangements can be a great gift to helping a family member get some traction on the road to homeownership, and be rewarding for both parties, if they work out. It can also be a very stressful experience if things go wrong.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtn mortgageguy.com.
