Should I Pray or Should I Co?
I tend to see a fair amount of high loan-to-value mortgage scenarios, mostly because real estate values here in Marin County, the San Francisco Bay Area and coastal California, in general, tend to be high. And I think it also has a lot to do with the formidable task of saving the funds necessary to purchase some homes, which we know can take a prohibitively long time. So 10% down payments, or even less, are not at all uncommon, and I’ll see these across the borrowing spectrum, from loan amounts in the conforming range (below $417,000), all the way to home values exceeding one million dollars.
Not infrequently, I will also see buyers who may need a boost to their incomes in order to meet today’s required debt-to-income ratios. As a result of both of these situations, a common question I’ll hear is, “Which is better, getting a gift or using a co-signer?” Not surprisingly, the answer is, “It depends.” The two strategies are often not aimed at meeting the same ends and one is usually a better fit than the other in any case, so let’s define both.
This would the “pray” part of our blog title, as you might suspect! Gift funds can sometimes be the easiest and best way to bridge a down payment gap. But there are these considerations for both the recipient and the donor:
- The person giving the gift usually must be a family member, though the FHA permits employer gifts. If you plan to get a gift from someone not related by blood (even an ex-spouse, for example), ask us first if it will be acceptable.
- The donor of a gift must provide a letter stating that no repayment is expected, and may be required to show ability to give the gift (bank statements, etc.).
- There may be tax implications for the person giving the gift, so do them a favor and have them first discuss their intended largesse with their tax professional.
- Some mortgage programs require that the borrower contribute a certain percentage of the down payment (usually 5%), even where a gift is involved.
- Gift funds are rarely allowed on investment home purchases.
- Gift funds can typically not be used with our REX Homebuyer program, but ask me for details if you’re considering REX.
- Gift funds cannot be a loan, implicit or explicit.
Technically speaking, co-signers are actually “non-occupant co-borrowers,” (let’s call them NOCBs). This means they will be borrowers on the loan application, but they do not intend to share occupancy in the home with you. Use of additional borrowers is most often targeted at adding income to a profile, versus funds for the down payment, though adding a NOCB might indeed negate the need for a gift.
- Most importantly, NOCBs cannot be used to strengthen the credit profile of a primary borrower. We will always grade a loan application via the lowest middle FICO score of all borrowers. In short, NOCB’s cannot bring the credit score of a file up, but they can bring it down.
- NOCBs can be used to add income and assets, but remember that their debt also gets considered in the overall picture.
- Some mortgage programs require that the primary borrower provides a certain percentage of the income that gets factored into the overall debt ratio.
- Other programs, like FHA and Freddie Mac-backed loans will allow us to “blend ratios,” meaning that the primary (occupant) borrower could conceivably have no income, while the NOCB does all the qualification heavy lifting.
- Good non-occupant co-borrowers are parents who have passed their peak overhead years, but are not yet retired, and who have excellent credit.
- All NOCBs must carefully consider their borrowing needs in the years ahead, as they will be fully responsible in the eyes of many future creditors for paying any Note on which they “co-sign.”
Both gifts and co-signers can be a viable solution for a buyer who needs some assistance with his or her mortgage qualification, whether that help comes in the form of bolstering down payment funds or in augmenting income to qualify. But know that I’m happy to help find the better fit for your specific scenario, and RPM’s wide array of loan programs gives you an advantage that few other lenders will be able to match. If you’d like to discuss the finer details of either approach, get in touch today.