In short, there are two ways a relative can help you qualify for a mortgage including being a co-borrower on your loan or providing a down payment gift. Continue reading to understand the positives and negatives of each approach so you can determine the best way for a relative to help you buy a home.
The first way your relative can help you qualify for a mortgage is to be a co-borrower (technically called a co-mortgagor) on your loan. Also commonly referred to as co-signing the loan, your relative is included on both the mortgage note and as an owner on the property title, so you own the home together and are both legally responsible for the loan.
In this scenario, your relative's income is included in your application so it may be used to help you qualify for the mortgage or afford a higher loan amount. On the other hand, if your relative has a significant amount of monthly debt expenses, including their own monthly mortgage or rent payment, it can make qualifying for the loan more challenging.
The lender also reviews the credit reports for all applicants, including your relative, and uses the lowest credit score among the borrowers to set your loan terms and to determine if you are eligible for the mortgage. This is why it may be problematic if your relative has a low credit score.
Use ourTWO PERSON MORTGAGE QUALIFICATION CALCULATORto determine the loan two people can afford based on their combined monthly income and debt expenses
It is important to understand that lenders may apply different qualification requirements if a co-borrower does not live in the property being financed. An example of this scenario is if you and a relative apply for the mortgage as co-borrowers but only you plan to live in the property.
In this case, the lender may limit the debt-to-income ratio for the applicant who lives in the property, which can lower the loan amount you qualify for. This guideline varies by lender and loan program so be sure to understand the mortgage you are eligible for before you submit your application.
The second way your relative can help you buy a home is to give you a down payment gift. In this scenario, your relative does not need to be on the mortgage or the property title, in which case only you own the home and are solely legally responsible for the loan.
Please note that lenders have relatively strict guidelines about using gifts for the down payment on a home. The gift provider, your relative in this case, 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 other loans secured by the property you purchase and that all of your debt obligations are factored into your application. It can also be helpful if the gift funds are deposited in your bank account, or seasoned, for at least two months prior to applying for the mortgage.
Review The Down Payment Required to Buy a Home including requirements for a down payment gift
Additionally, if your relative takes out a loan on their house, such as a home equity loan or HELOC, to provide the down payment gift, some lenders require that the relative demonstrates the financial ability to make the loan payments. If the relative is a co-borrower on your mortgage then those payments are also included in the debt-to-income ratio for your loan.
It is also important to emphasize that any loan your relative takes out for the down payment gift, if necessary, is secured by their property and not by the home that you purchase. So you are not using your relative's home as collateral for the mortgage on the home you buy.
The table below shows mortgage terms for leading lenders near you. We recommend that you contact multiple lenders to confirm their guidelines for relative co-borrowers and down payment gifts. Shopping lenders is also the best way to save money on your loan.
"B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction." Selling Guide: Fannie Mae Single Family. Fannie Mae, June 5 2018. Web.
"B3-4.3-04, Personal Gifts." Selling Guide: Fannie Mae Single Family. Fannie Mae, September 29 2015. Web.