When Home Buyers Ask Mom and Dad for Cash
Home buyers having trouble making a down payment can turn to their parents for help. But it’s best when financial aid is in the form of a gift—not a loan.
Anya Martin | Wall Street Journal | August 1, 2013 | link
Having trouble making that down payment? Call your mother. Maybe she and dad can help.
Financial experts say that parental help is best when the money is a gift, with no expectation of repayment. That is because loans from family members can create extra hurdles when a home buyer applies for a mortgage.
Lenders typically view a family loan as another burden that could affect a borrower’s ability to make monthly payments, said Tom Wind, executive vice president of residential and commercial lending at national lender EverBank EVER -0.26% . In fact, a loan from a parent could raise a borrower’s debt-to-income ratio sufficiently to result in disqualification for a mortgage, he added.
Parental loans also fall under the category of unsecured debt, meaning that no asset is acting as collateral, which can pose a lending risk. Edward J. Achtner, Bank of America‘s BAC -0.46% senior vice president in north California and Oregon, said his company generally doesn’t allow unsecured debt—such as credit-card advances—as a funding source for a jumbo mortgage down payment, Mr. Achtner said. To be considered, a loan from a relative would have to be secured with collateral such as a traditional secondary mortgage, counted toward the maximum loan-to-value ratio, and included in the underwriting process, he said.
Gifts—with no strings attached—are a different matter. Even then, EverBank and other lenders typically like to see home buyers contribute at least 10% of the loan amount to the down payment. “We are looking for borrowers to have their own equity in the transaction because that’s an indication of their ability to manage their own finances,” Mr. Wind said. “If someone is coming to the closing with a down payment that is all gift money, we’d consider it, but only on a case-by-case basis.”