The Gift of Real Estate

DEC 19, 2012 5:03pm ET

If a buyer has less than 20% down and is receiving a gift from a family member to make up the down payment, they must have 5% of their own documented funds go into the transaction. The family member will have to complete a gift letter form and prove that they have the money to give and the borrower will have to prove that they received the gift.

If the down payment is equal to or greater than 20% it can all be from a gift. FHA programs and specific first time buyer programs allow all gift money for the down payment with as little as 3.5% down payment required and 100% of that can be a gift.

If a donor has a joint bank account with the borrowing entity then no gift letter will be required although the donor may be required to write a letter stating that the funds are available to be used by the borrower.

If the parent or donor wants to give the gift months in advance of the purchase a gift letter may not be required if the funds have been held for enough time per the lenders individual guidelines.

The official term for a co-borrower, co-mortgagor or co-signer is "non-occupant co-borrower". These loans are harder to come by today and for conventional financing require a 20% down payment. However FHA allows for a co-signer with as little as a 3.5% down payment.

When someone co-signs for a mortgage they are jointly and severably liable for that mortgage debt (meaning that legally the co-signor will be seen as a separate and legally liable entity on the contract).

The mortgage payment will show on the co-signers credit report and will be counted as debt against them as well as the entity making the mortgage payments. Any late payments will severely and negatively impact both the occupant and non-occupant's credit scores.

If a non-occupant co-mortgagor wants or needs to apply for credit of any kind the mortgage debt will count against them unless they can offer 12 months of cancelled checks indicating that another party is making the payments on the debt, which could mean waiting for a year...

(Be warned, mortgage lending guidelines change and we would not be surprised if this practice is eliminated in the future and the full debt is always counted against the non-occupant so plan accordingly!)

The only way for a co-signor to come off of a loan they have co-signed is for the occupant borrower/s to refinance and remove the co-signer, or to sell the property. Therefore, the co-signor needs to be aware that this could be a long term commitment.

As with everything real estate and mortgage related these days you need to consult with your lender before you take any action. You must make sure you understand the implications of your actions in the short term and far into the future.

It is terrible when the unintended consequences of an action result in credit problems or cash flow issues later on. We are here to help you figure out how to help your children or other family members take advantage of this great real estate climate.