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May 7, 2001
"We don't think we
will have the 20% down payment necessary to avoid mortgage insurance, but
we can get money from various family members. Are there any restrictions
on getting cash from family members?"
Lenders have two major
concerns regarding intra-family transfers. The first is that
unacknowledged gifts from family members will be used to meet the entire
down payment requirement. Lenders view loan applicants who have not been
able to accumulate significant assets on their own as riskier than those
who have.
The second concern is with
gifts that are really unsecured loans from family members in disguise.
Lenders fear that a borrower who gets into financial difficulties will
give first priority to paying off the family member.
The rules governing financial
assistance from family members reflect these concerns. On conventional
loans having down payments of less than 20% of property value, at least 5%
of the down payment must come from the applicant's own funds. (There are
some special programs for which the own-funds requirement is only 3%). The
balance can come from a gift or a secured loan. With a 20% down
payment, the entire amount can come from gifts or secured loans.
Note that secured loans must
be reported as existing debt and the payments on them are included in
total housing expenses. If this total as a percent of your income exceeds
the lender's guidelines, a secured loan may not work where a gift would
work.
"I was surprised
that I had to inconvenience the family members who gave us a cash gift
toward our house purchase. They have to provide the most recent 2 months
of their bank statements, the cancelled check they gave us, and a signed
gift affidavit. What is the point of all this?"
The point is to protect the lender
against two possible hazards. One is that the gift is actually coming from
the home seller, which would mean that it isn�t really a gift at all.
Rather, it would be offset by a corresponding increase in the sale price,
which would mean that your equity in the property would be less than it
appears.
Suppose you purchase a house for
$200,000, putting $20,000 (10%) down. If $10,000 of the down payment is
provided by a bona fide gift, your equity remains $20,000. But if the
$10,000 "gift" comes from the seller who raises the price by the
same amount, the loan rises from $180,000 to $189,000, and your equity is
only $11,000 -- $210,000 minus $189,000.
To avoid this, the person
providing the gift must prove that the money was really theirs, and that
it has gone to the buyer.
The second hazard to the lender is
that the "gift" is in reality a loan that the buyer will have to
repay. Any such repayment obligation could jeopardize the buyer�s
ability to make the mortgage payments. To avoid this, your family members
had to sign a gift affidavit indicating that the money they gave you was
truly a gift and that no repayment was expected.
Loans for the purpose of helping a
buyer meet the cash requirements of a home purchase are not prohibited.
But the repayment obligation is added to the total expenses that are
compared to the buyer�s income. If the ratio of expense to income is too
high, the buyer may be denied a loan, or kicked into a higher-price loan
program.
Copyright Jack Guttentag
2002
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