Down Payments, amiright?
The downpayment on a house is a hefty sum. We’re not even talking the full 20% to avoid PMI, even just the 3% to get a basic FHA loan can truly be a financial burden. It takes a village to raise a child, but good hell, these days it takes a village to buy a house! So, how can your friends and family help?
First, let’s distinguish between can and should. Can they help? Yes, certain people can help no problem. Other people can help you, but maybe they shouldn’t. Let’s get into it.
Lenders need to be certain of your financial position.
Lenders like certainty. They’re providing you with all of the money upfront to buy a house, they want to ensure they are going to get their money back. So if your best friend’s sister’s boyfriend’s brother’s girlfriend heard from this guy who knows this kid who’s going with the girl (Bueller anyone?) who wants to give you $2000 towards your down payment, they’re going to feel uneasy. Is this a real gift? Is this expected to be repaid? That changes your debt-to-income ratio.
Lenders are much more amiable when parents, siblings, or direct-line relatives give you money for your house. Typically it’s because these sources can be trusted to be non-repayment. Sometimes they might ask for documentation from you and the gift-giver, to ensure that everyone is on the same page and agrees this is a gift. If your best friend’s sister’s boyfriend’s brother’s girlfriend really wants to give you $2000 towards your down payment, she can, but she’d need to provide documentation to prove it. This could delay the loan process depending on how quickly everyone can get proper bank statements, and certified letters.
You don’t want to say no to free money, but you should know what to prepare for.
So can anyone help you? Certainly. But you’ll want to weigh that with your other prerogatives like getting into a house in a specific timeframe and not losing financing because it’s taken too long. There’s a timeline to everything when buying a house, especially once you’re under contract, so being able to acquire the proper financing in the proper time frame is vital.
There is one caveat to all of this, lenders don’t typically check bank statements for more than 2-3 months back. So if everyone wanted to give you money at the same time, there’s no reason for an explanation. If you know this ahead of time, this would make the process easier and I would recommend asking anyone to help in preparation of buying a house, as opposed to during the process, to avoid delays.
A great time to do this would be for your wedding. It’s become popular to use wedding registries as down payment assistance plans, in lieu of wedding gifts. You can set up several online registries to use, or even accepting via venmo, etc is easier tracked when it’s for a verifiable special occasion and is less likely to be questioned as legitimate
(You should be aware that gifts over a certain amount incur a gift tax, owed by the giver. This amount changes year to year with tax rules, but consider everything above $15k to need additional documentation or fees.)
If you’re not getting married anytime soon, borrowing money from friends or family is another option. It has a lot less formality associated with it than a financial institution. However, if you’ve agreed to repay your friend, that cuts down on your accessible income and can impact your DTI, regardless of whether this loan would show up on your credit report. You’ll want to factor this in with your mortgage lender so they can properly assess your financial status and not approve you for more house than you can truly afford.
Maybe it’s not a gift or a loan, and you want to look into buying a house with a friend.
Maybe you can’t afford a house on your own, and you don’t have a significant other you’d like to share that with. So, you decide to co-buy. This is a simple and perfectly acceptable option, with little difficulty. You’ll need to apply together for preapproval and would essentially be co-signers, ensuring the loan for the other.
The biggest concern is who you’re hitching your mortgage wagon to, since you’re both 100% liable for the full mortgage amount (which also greatly impacts your credit score and credit acquisition potential). So just because your new co-buyer can’t afford their half one month, the bank isn’t going to accept “but it’s their half” as a reasonable excuse for defaulting.
Vetting your friends financial status before agreeing to this might harm your relationship in the short-term, but long-term could save you both a world of hurt if your decision to buy a house together is stopped once you realize it’s not in either of your best interest.
When it comes to buying a house, the people who help you are almost as important as the house decision itself. Their impact can be felt for the duration of your loan, depending on your option, so choose wisely, and good luck!