We all know that getting a loan is much harder to get and to qualify for nowadays. First time homebuyer programs with low down payment requirements of 3.5%-5.0% down are still available, but they can be somewhat restrictive in who can get them, and can also be more expensive.
So when lenders are telling you that – depending on your income, credit score or location that you’re buying – you must put down 10%, 15% and sometimes 20% down on the home, then it can come as a shocker. 20% on a $500,000 home isn’t any little bit of money, and $500k doesn’t buy you the grandest home in many California areas.
So what are your options?
Firstly, you can do it the old-fashioned way: scrounge, scrimp and save. You won’t buy just yet, but you’ll get there. Although when “there” comes around, home prices may be higher, interest rates may be higher and the programs you qualify with now may be nonexistent.
For the “now,” here are a couple options that have worked out for some of my clients:
1. Non-occupant co-borrower.
In more traditional terms, this is a co-signer who will not live in the property with you, but will help you get a loan. To make this work, the co-signer generally has to be an immediate family member. Their credit, their income and their debt gets factored into the entirety of the loan. There are limitations to non-occupant co-borrower loans, such as you as the primary buyer (you) having to qualify to a certain extent on your own, in some cases you must put a minimum of 5% down from your own funds and, more importantly, there is a maximum loan amount (currently $417,000.00).
2. Gift of down payment from the Bank of Mom and Dad.
You’ll have to contribute 5% of your own funds, but any remaining portion can come from your parents or a family member. The donor will have to sign a “gift letter” stating that there is no obligation of repayment and we’ll have to track the gift money. Tax laws are a different story, but in 2009 the gift tax exemption will be increased from $12,000 to $13,000. For instance, if you’re married, your Mom can gift you $13,000 and your spouse $13,000 and your Dad can gift you $13,000 and your spouse $13,000 for a total of $52,000 without tax repercussions. And of course they can gift more, but they may be subject to paying taxes on a certain amount. I’m not a tax advisor and can’t guarantee any of this information, so please speak to your tax advisor about the specifics.
3. A loan from the folks.
See if Mom and Dad can lend you money (in case they don’t want to gift you the down). We’ll have to prepare a Note and record the Note against the home and you’ll have to qualify with the monthly payment, but this is also a great option in this market where 2nd loans are non-existent. It helps you avoid having to pay Private Mortgage Insurance as well (which is required when you have less than 20% down and can be expensive), and you can also get a loan through a conventional lender, where there isn’t a “Funding Fee” for getting the loan.
Sometimes it’s a matter of knowing that you have options, weighing those options and figuring out the next steps from there so that you can develop a plan.
