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How Loan from Relative Affects Qualify For Mortgage

We received a loan from a relative to pay-off credit card debt to help us qualify for a mortgage. Will the monthly withdrawals from our bank account to pay off the loan hurt us when we apply for a mortgage? We are also living with the relative rent-free.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

As long as you document the loan from your relative then the monthly withdrawals from your bank account should not create an issue. You should draft a brief summary outlining the key terms of the loan including loan amount, length, interest rate and monthly payment that you can provide lenders if they ask about the withdrawals. It may also be helpful to have a paper trail of your payments so you should ask your relative to keep a record of the monthly payments including bank statements or cancelled checks, if applicable. Additionally, it would be ideal if the loan from your relative is repaid in full before you apply for a mortgage but that may not be necessary depending on your debt-to-income ratio, credit score and other borrower qualification guidelines. Keep in mind that the lower your debt, the higher the mortgage amount you can qualify for.

You should also be aware that lenders usually request a residence history when you apply for a mortgage so your relative may need to write a short letter explaining that you live with her rent-free. Some lenders may also request proof of rental payments but this is relatively uncommon and the letter from your relative should sufficiently address that issue. If you run into any problems on this point you could attempt to claim that your loan payments to your relative also covered the monthly rent. If you are new to the mortgage process you should review our Mortgage Cheat Sheet which addresses key mortgage topics from loan application through closing.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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