Author Topic: Down Payment Question  (Read 8127 times)

Forcus

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Down Payment Question
« on: August 19, 2013, 04:35:03 PM »
Helping a friend do a mortgage app and I am short on information. Her parents want to loan her most of the down payment money but I wasn't sure if the banks consider down payment money loaned from family as equivalent to borrowing from any other source (i.e. bank). My understanding is a gift wouldn't be considered a loan or negatively impact the approval process but that a loan would. I am no help here. Help?

huadpe

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Re: Down Payment Question
« Reply #1 on: August 19, 2013, 04:47:30 PM »
Helping a friend do a mortgage app and I am short on information. Her parents want to loan her most of the down payment money but I wasn't sure if the banks consider down payment money loaned from family as equivalent to borrowing from any other source (i.e. bank). My understanding is a gift wouldn't be considered a loan or negatively impact the approval process but that a loan would. I am no help here. Help?

A gift that is truly a gift won't impact the mortgage and shouldn't hurt the approval process.  A loan from the parents will hurt approval.  A loan that's called a gift is a violation of the law.  The lender will require a letter from the parents saying that the money is a gift and not a loan.  If the amount is above $26,000 (13k per parent), it would also be subject to gift tax rules.

Forcus

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Re: Down Payment Question
« Reply #2 on: August 19, 2013, 04:54:38 PM »
Helping a friend do a mortgage app and I am short on information. Her parents want to loan her most of the down payment money but I wasn't sure if the banks consider down payment money loaned from family as equivalent to borrowing from any other source (i.e. bank). My understanding is a gift wouldn't be considered a loan or negatively impact the approval process but that a loan would. I am no help here. Help?

A gift that is truly a gift won't impact the mortgage and shouldn't hurt the approval process.  A loan from the parents will hurt approval.  A loan that's called a gift is a violation of the law.  The lender will require a letter from the parents saying that the money is a gift and not a loan.  If the amount is above $26,000 (13k per parent), it would also be subject to gift tax rules.

It is most definitely a loan from her parents. No gifting. I just wasn't sure if it was equivalent to borrowing from any other source or if family is given a mulligan and it doesn't hurt the app as much.

huadpe

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Re: Down Payment Question
« Reply #3 on: August 19, 2013, 08:42:54 PM »
Helping a friend do a mortgage app and I am short on information. Her parents want to loan her most of the down payment money but I wasn't sure if the banks consider down payment money loaned from family as equivalent to borrowing from any other source (i.e. bank). My understanding is a gift wouldn't be considered a loan or negatively impact the approval process but that a loan would. I am no help here. Help?

A gift that is truly a gift won't impact the mortgage and shouldn't hurt the approval process.  A loan from the parents will hurt approval.  A loan that's called a gift is a violation of the law.  The lender will require a letter from the parents saying that the money is a gift and not a loan.  If the amount is above $26,000 (13k per parent), it would also be subject to gift tax rules.

It is most definitely a loan from her parents. No gifting. I just wasn't sure if it was equivalent to borrowing from any other source or if family is given a mulligan and it doesn't hurt the app as much.

Equivalent to borrowing from any other source.

fumanchu282

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Re: Down Payment Question
« Reply #4 on: August 20, 2013, 06:46:00 AM »
What about a situation where the parents put up the money for the down payment, but then are partial owners? i.e. they pay the 20% down payment but then are entitled to 20% of the equity? Does such a thing exist?

xtrfuel

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Re: Down Payment Question
« Reply #5 on: August 20, 2013, 11:41:02 AM »
Helping a friend do a mortgage app and I am short on information. Her parents want to loan her most of the down payment money but I wasn't sure if the banks consider down payment money loaned from family as equivalent to borrowing from any other source (i.e. bank). My understanding is a gift wouldn't be considered a loan or negatively impact the approval process but that a loan would. I am no help here. Help?

A gift that is truly a gift won't impact the mortgage and shouldn't hurt the approval process.  A loan from the parents will hurt approval.  A loan that's called a gift is a violation of the law.  The lender will require a letter from the parents saying that the money is a gift and not a loan.  If the amount is above $26,000 (13k per parent), it would also be subject to gift tax rules.

28k for 2013.  14k each

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes


Daleth

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Re: Down Payment Question
« Reply #6 on: August 20, 2013, 12:08:51 PM »
What about a situation where the parents put up the money for the down payment, but then are partial owners? i.e. they pay the 20% down payment but then are entitled to 20% of the equity? Does such a thing exist?

You'd have to ask your bank but I highly doubt it would work. They probably wouldn't consider it a residential mortgage, because two of the owners (the parents) wouldn't be living there. You could always do it on the back end--have the parents provide the money as a gift, close on the house, and then after closing go see a lawyer and have papers drawn up to make the parents 20% owners. The downside there is that you might have to pay transfer tax (local stamp tax, paid when property changes hands) on the 20% being transferred to the parents. The other downside is that if this is your plan from the outset, then technically you're committing mortgage fraud because the parental gift wasn't really a gift.

huadpe

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Re: Down Payment Question
« Reply #7 on: August 20, 2013, 12:32:30 PM »
What about a situation where the parents put up the money for the down payment, but then are partial owners? i.e. they pay the 20% down payment but then are entitled to 20% of the equity? Does such a thing exist?

You'd have to ask your bank but I highly doubt it would work. They probably wouldn't consider it a residential mortgage, because two of the owners (the parents) wouldn't be living there. You could always do it on the back end--have the parents provide the money as a gift, close on the house, and then after closing go see a lawyer and have papers drawn up to make the parents 20% owners. The downside there is that you might have to pay transfer tax (local stamp tax, paid when property changes hands) on the 20% being transferred to the parents. The other downside is that if this is your plan from the outset, then technically you're committing mortgage fraud because the parental gift wasn't really a gift.

You can't do that because the mortgage lien on the property prevents any transfer of ownership without the approval of the mortgage company, and they aren't going to approve you just handing away 20% of their collateral.  Also they'll (rightly) cry foul for mortgage fraud.

Samsam

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Re: Down Payment Question
« Reply #8 on: August 20, 2013, 01:25:39 PM »
I am going through this process right now.  The loan consultant had to make sure that some of the down payment was coming from me.  I don't quite remember for sure...but I think at least 5% (maybe 7%) for the down payment has to come from the person on the loan and then you can have gifts.

Question:  If my parents sign something saying I don't owe them x amount they gave, and then I give it back to them later out of my own free will....Does anything happen?  Or will people see that as a loan?

fumanchu282

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Re: Down Payment Question
« Reply #9 on: August 20, 2013, 01:41:54 PM »
what if it was an investment property? how could I join with my parents to be co-investors? Is there no way to do this on a residential property without forming a single legal entity and then investing through that entity?

Spork

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Re: Down Payment Question
« Reply #10 on: August 20, 2013, 02:32:24 PM »
Helping a friend do a mortgage app and I am short on information. Her parents want to loan her most of the down payment money but I wasn't sure if the banks consider down payment money loaned from family as equivalent to borrowing from any other source (i.e. bank). My understanding is a gift wouldn't be considered a loan or negatively impact the approval process but that a loan would. I am no help here. Help?

A gift that is truly a gift won't impact the mortgage and shouldn't hurt the approval process.  A loan from the parents will hurt approval.  A loan that's called a gift is a violation of the law.  The lender will require a letter from the parents saying that the money is a gift and not a loan.  If the amount is above $26,000 (13k per parent), it would also be subject to gift tax rules.

28k for 2013.  14k each

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes

If it is from married parents to a married couple, it can to as high as $56k. 
In other words:
Mom gives son $14k
Mom gives DIL $14k
Dad gives son $14k
Dad gives DIL $14k

Throw a child in there... and it goes up again.
(I am not a tax attorney ... but that is my understanding of it.)

fumanchu282

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Re: Down Payment Question
« Reply #11 on: August 20, 2013, 03:13:28 PM »
Here's what I was getting at, a Shared-Equity Mortgage

https://www.lendingtree.com/mortgage/buy-home-shared-equity-mortgage-article

Daleth

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Re: Down Payment Question
« Reply #12 on: August 21, 2013, 04:12:14 PM »
What about a situation where the parents put up the money for the down payment, but then are partial owners? i.e. they pay the 20% down payment but then are entitled to 20% of the equity? Does such a thing exist?

You'd have to ask your bank but I highly doubt it would work. They probably wouldn't consider it a residential mortgage, because two of the owners (the parents) wouldn't be living there. You could always do it on the back end--have the parents provide the money as a gift, close on the house, and then after closing go see a lawyer and have papers drawn up to make the parents 20% owners. The downside there is that you might have to pay transfer tax (local stamp tax, paid when property changes hands) on the 20% being transferred to the parents. The other downside is that if this is your plan from the outset, then technically you're committing mortgage fraud because the parental gift wasn't really a gift.

You can't do that because the mortgage lien on the property prevents any transfer of ownership without the approval of the mortgage company, and they aren't going to approve you just handing away 20% of their collateral.  Also they'll (rightly) cry foul for mortgage fraud.

No, you just have to transfer to someone who "takes title subject to the mortgage" (i.e. their interest in the property is subordinate to the bank's). Even if you don't fill out paperwork specifically saying they're taking subject to the mortgage, in most if not all states that's automatically how they'll take their interest, because banks just about always record the mortgage and recording it functions legally as if they had told everyone, including future buyers or future people who take a legal interest in the house, that there's a mortgage on it.

In other words if you buy a house and then turn around the next day and transfer title to, say, your husband or parents or whoever, you did not just transfer away the bank's collateral. Putting someone else's name on the title doesn't take away the bank's collateral any more than putting your name on title at closing did. The title is in whoever's name, but the bank still has a lien on the house.

The potential or theoretical fraud isn't in transferring part or all of your interest to someone else, it's in concealing from the bank that what your parents intended when they gave you money was not a gift, but a loan or partial interest in the house.

Daleth

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Re: Down Payment Question
« Reply #13 on: August 21, 2013, 04:14:03 PM »
what if it was an investment property? how could I join with my parents to be co-investors? Is there no way to do this on a residential property without forming a single legal entity and then investing through that entity?

If nobody's living at the house, there's no problem. You can all buy it, though you'll be charged investment-property interest rates rather than primary residence rates (so maybe + 0.5%). The problem is if some buyers live there and others don't. You generally can't get a primary residence rate on your loan in that case, because it's not ALL buyers' primary residence.

KingMe

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Re: Down Payment Question
« Reply #14 on: August 21, 2013, 05:05:26 PM »
I don't see anything morally wrong with saying that a loan between a parent and child for this purpose is a gift to get mortgage approval. If the loan isn't secure against the property, which would be dumb to do if you were to characterize a loan as a gift in a loan application, no one is really being hurt. Yes, it's lying and a crime, but, really, who's going to know? In reality, are the parents really going to cause the child to foreclose on the house for lack if repayment?

Daleth

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Re: Down Payment Question
« Reply #15 on: August 21, 2013, 05:09:27 PM »
I don't see anything morally wrong with saying that a loan between a parent and child for this purpose is a gift to get mortgage approval. If the loan isn't secure against the property, which would be dumb to do if you were to characterize a loan as a gift in a loan application, no one is really being hurt. Yes, it's lying and a crime, but, really, who's going to know? In reality, are the parents really going to cause the child to foreclose on the house for lack if repayment?

Hey, I'm with you on that. To me the question is, who's getting hurt? Nobody? Ok, then it's not morally wrong, and even if it might technically be a crime, it shouldn't be.

lhamo

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Re: Down Payment Question
« Reply #16 on: August 21, 2013, 05:35:55 PM »
In reality, are the parents really going to cause the child to foreclose on the house for lack if repayment?

Maybe.  Things can get REALLY ugly in relationships and life when money is involved.

If I were you, I would suggest to the friend that she rethink this whole deal.  If she needs to borrow money from her parents as well as the bank, she can't afford the house.  She needs to learn to LBHM, build up her savings and get to a position where she can actually afford to do this on her own.  If she's disciplined and has a decent income, it shouldn't take more than a few months.  If neither of those things apply, then she's setting herself up for disaster and a lot of emotional issues with her parents if she proceeds with this plan.


Spork

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Re: Down Payment Question
« Reply #17 on: August 22, 2013, 07:20:22 AM »
I don't see anything morally wrong with saying that a loan between a parent and child for this purpose is a gift to get mortgage approval. If the loan isn't secure against the property, which would be dumb to do if you were to characterize a loan as a gift in a loan application, no one is really being hurt. Yes, it's lying and a crime, but, really, who's going to know? In reality, are the parents really going to cause the child to foreclose on the house for lack if repayment?

I don't think the issue here is "are the parents going to foreclose."  The issue is (potentially) "you signed a paper that made us think you could afford this house and you cannot."

If you represent yourself as having X dollars a month to spend on a house payment and you don't have that -- you're committing a bit of a fraud.  You're a higher risk than the bank thinks you are.  You've probably qualified for a lower interest rate (or maybe you wouldn't have qualified at all).

From the bank's point of view, you're scamming them.  Now: in the end it may all work out and be roses and glitter... but lying to someone that's loaning you hundreds of thousands of dollars is not a good idea.

Forcus

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Re: Down Payment Question
« Reply #18 on: August 22, 2013, 08:29:02 AM »
In reality, are the parents really going to cause the child to foreclose on the house for lack if repayment?

Maybe.  Things can get REALLY ugly in relationships and life when money is involved.

If I were you, I would suggest to the friend that she rethink this whole deal.  If she needs to borrow money from her parents as well as the bank, she can't afford the house.  She needs to learn to LBHM, build up her savings and get to a position where she can actually afford to do this on her own.  If she's disciplined and has a decent income, it shouldn't take more than a few months.  If neither of those things apply, then she's setting herself up for disaster and a lot of emotional issues with her parents if she proceeds with this plan.

Yeah, I already did (suggest she wait), but if she's going to do it I wanted her aware.