Buying overview -> Gift funds / co-signers

Gift funds / co-signers

High home prices have made it difficult for many first-time homebuyers
to get a foothold in the housing market.

Using gift money to help with the purchase of a residence has become very common. Depending on the lender and the loan program the borrower may be required to use some personal, seasoned funds in addition to the gift funds. Most programs specify that the borrower contribute at least 5% of the purchase price if the total down payment including gift is less than 20%. However, there are a few programs available that will allow all of the down payment and closing costs to come from a gift. Also, as a general rule, gifts must come from a relative of the borrower.

If you are considering receiving a gift, here are some things you and your donor need to know:

  • You will need a letter from the donor stating that the funds are a gift, and that there is no expectation of repayment; your lender should be able to provide you a template for this letter.
  • You will usually need to provide a copy of the donor’s check or proof of a wire transfer from the donor, and a statement from the donor’s account from which the money came, to demonstrate that the donor had the funds available to gift, and either a statement or a screenshot from your account showing the gift deposited.
  • If your donor has moved money to make the gift – for instance, from a savings account into a checking account to facilitate a wire – you may need statements from both accounts. Lenders require this in order to make sure that you aren’t ‘washing’ a loan you have received from someone else through your gift donor’s account.

If you are receiving a gift from someone who is not a relative, or who cannot or will not comply with the verification protocols, there is an alternative if you plan ahead. You need to verify only those assets which show as deposits on the two most recent, consecutive account statements you provide to the lender. Funds that were in your account prior to the two most recent statements do not have to be verified, regardless of the source.

Using a co-signer

A co-signer might be able to help a borrower with a high debt-to-income ratio.

Many borrowers who do not qualify because their debt-to-income ratio (DTI) is too high will turn to a family member or close friend to help them qualify for a mortgage when lack of sufficient income is an issue.

In order for a co-signer to help with qualifying, the lender must allow ‘blended ratios with a non-occupant co-borrower’. This means that the income and debts of the co-signer are added to the income and debts of the borrower. The DTI is figured using the combined income and debt, and if the total DTI does not exceed the lender‘s guidelines – these days 43% is a common standard – the loan should be approved.

Here are some things to know about co-signing:

  • The co-signer is fully obligated for the loan, and it will show on the co-signer’s credit report. If there is a late payment, the co-signer’s credit will be negatively impacted.
  • The non-occupant co-borrower’s ability to qualify for other debt will be impacted, as the payment on the new loan will affect the co-signer’s DTI until the loan is paid off; this can be an issue if the co-signer is planning on financing a property purchase or refi or will be taking on other debt. However, most lenders will not count the debt against the co-signer after six payments have been made on the new loan, with documentation that the occupant-borrower has been making all of those payments, and making them on time.
  • The co-signer has to have enough income to actually help. Often retired parents with fixed income are unable to help as co-signers because their income is too low, even if they have very little debt, perfect credit and healthy savings. Blending ratios with someone who has little income can make the DTI higher rather than lower. Also, the co-signer has to come up with the same reams of income and asset documentation as the borrower.
  • Non-occupant co-borrowers are permitted on conforming loans underwritten by Freddie Mac up to the conforming loan limit (high-balance conforming loan limit in applicable counties). For borrowers who also have limited down payment and need mortgage insurance, it is available. Another low down payment option with a co-signer is FHA, which will allow blended ratios with the minimal down payment of 3.50% of the purchase price, with the same loan size limits as Freddie Mac.
  • There are few jumbo lenders that will allow blended ratios. Some jumbo lenders that do allow blended ratios have some combination of higher pricing and other restrictions. A mortgage broker may be your best guide if you need a co-signer on a jumbo loan.