Giving your relative a gift for the down payment on a home that would you live in is feasible but creates significant challenges when you apply for the mortgage. Additionally, most mortgages are not assumable, which makes what you want to do nearly impossible. Below we review the numerous issues you should be aware of with this scenario.
Providing a Gift to a Relative for the Down Payment on a Home
You can provide a gift to your relative to make a down payment to buy a home but mortgage lenders have relatively strict guidelines over how the gift is made and request certain documentation regarding the gift. You are required to provide a gift letter that outlines the terms of the gift and document the source of funds. Lenders want to ensure that the down payment gift is truly a gift and not a loan that your relative is required to pay back.
Review the Down Payment Required to Buy a Home including the guidelines for a down payment gift
Borrower Qualification Requirements
Unless you apply for the mortgage as co-applicants, your relative must be able to qualify for the mortgage on their own based on their credit score, debt-to-income ratio and other qualification requirements. For example, your relative must be able to afford the mortgage payment based on her or his own monthly income and debt expenses.
Depending on whether your relative can qualify for the mortgage as a sole applicant, you may want to consider the HomeReady Mortgage Program which enables lenders to factor in additional sources of income, such as income from relatives, to qualify for a mortgage. Please note that rental properties are not eligible for the HomeReady Program, which is the next point we address.
Getting a Mortgage on a Rental Property
If your relative buys the home but you live in the property then he or she would be required to obtain a non-owner occupied mortgage, which has different qualification requirements and is more expensive than the mortgage on a home you live in. Rental property mortgages typically require borrowers to make a larger down payment and pay a higher mortgage rate than owner occupied loans.
You can review rental property mortgage terms below. We recommend that you contact multiple lenders to find the lowest combination of mortgage rate and closing costs.
Given the stricter borrower qualification requirements and more expensive terms for a rental property mortgage, it may make more sense for your relative to live in the home for at least a year after he or she buys it, which is the length of time you are required to occupy a property to qualify for an owner occupied loan. You could also live in the home during this time period but with this approach your relative qualifies for a lower interest rate and the required down payment may be lower.
Most Mortgages Are Not Assumable
Aside from FHA and VA loans, almost no mortgages are assumable. Additionally, FHA and VA loans cannot be used to buy rental properties. If a mortgage is assumable, which is uncommon, you are required to obtain lender approval before the loan is assumed by a new borrower. In most cases the new borrower must qualify for the mortgage based on the lender's guidelines.
If the new borrower does not qualify for the mortgage -- due to a credit challenges or other issue -- then the lender denies the request to assume the loan. In short, obtaining an assumable mortgage can be highly challenging and there is no guarantee that a new borrower can qualify to assume the loan.
Waiting Periods After Derogatory Credit Events
You mentioned that you cannot qualify for a mortgage right now due to credit issues. Although lenders require you to wait before you can apply for a mortgage following significant credit events such as a bankruptcy, short sale, default or foreclosure, the waiting periods are shorter if extenuating circumstances including a job loss or medical illness contributed to the event.
So depending on your specific credit issue and what caused it, you may be able to qualify for a mortgage on your own sooner than you think.
Review Mortgage Waiting Periods Following Negative Credit Events
Private Money Mortgage
Given the challenges outlined above, you may want to consider a private money mortgage. Most private money lenders, also known as hard money lenders, do not require waiting periods after negative credit events, although they charge a significantly higher interest rates and closing costs.
If you get a private money mortgage, we recommend that you refinance the loan with a traditional mortgage as soon as possible, taking into consideration any potential prepayment penalty.
Review How a Private Money Mortgage Works
If you apply for a private money mortgage be sure to fully understand the significantly higher rate, fees and possible prepayment penalty, charged by the lender.
You can use the FREEandCLEAR Lender Directory to search for private money lenders. Although private money lenders are usually much more expensive than traditional lenders, they may offer a more realistic option for you to buy a home today as compared to having your relative buy it.
"B3-4.3-04, Personal Gifts." Selling Guide: Fannie Mae Single Family. Fannie Mae, September 29 2015. Web.