In short, as explained below, there are two ways a relative can help you qualify for a mortgage to buy a home but neither involve using his or her house as direct collateral for the mortgage you use to buy your home.
The first way your relative can help you qualify for a mortgage and buy a home is to be a co-borrower (technically called a co-mortgagor) on your loan. In this case, your relative is included on both the mortgage and as an owner on the property title, so you own the home together and are both legally responsible for the loan. Your relative's assets can help you pay for the down payment on the home. For example, he or she could use personal funds to pay for the down payment as a gift to you.
Your relative's income may also be used as a supporting factor to help you qualify for the loan or afford a higher mortgage amount but you and any other co-borrower must demonstrate the ability to afford the monthly payment and repay the loan on your own. On the other hand, if your relative has a significant amount of monthly debt expenses it can make qualifying for the mortgage more challenging. Please note that certain loan programs, such as the HomeReady Mortgage Program, permit a greater emphasis on, and potentially a greater benefit from, non-occupant co-borrowers such as a relative.
The second way your relative can help you buy a home is to simply give you a down payment gift. In this case, your relative is not on the mortgage and is not on the property title. Only you own the home and you are solely legally responsible for the mortgage.
Please note that lenders have relatively strict guidelines about using gifts for the down payment to buy a home. The gift provider, your relative in this scenario, is required to provide a gift letter that confirms that the funds provided are truly a gift and not a loan that you are required to repay. Lenders want to make sure that there are no additional loans secured by the property you purchase and that you have no additional debt obligations that they are unaware of. It can also be helpful for the gift funds to be deposited in your bank account, or seasoned, for at least two months prior to applying for the mortgage. We provide a comprehensive overview of the down payment required to buy a home, including how to use a gift for a down payment, on FREEandCLEAR for you to review.
Additionally, if your relative takes out a loan on his or her house, such as a home equity loan or HELOC, to provide the down payment gift to you, some lenders require that the relative demonstrates the financial ability to make the payments on that loan. It is also important to highlight that any loan your relative takes out to provide you with the down payment gift, if needed, is secured by his or her property and not by the home that you purchase. So you are not using your relative's home as collateral for the mortgage to buy your home.
We always recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking MORTGAGE RATES We advise you to contact at least four lenders as qualification guidelines vary. Plus, shopping multiple lenders is the best way to save money on your mortgage.