A recent survey of 1,045 adults found that 77% of the Gen Z and Millennial cohorts expect their parents’ financial assistance when purchasing their first home. Of the young people surveyed, 38% expected help funding a down payment, 31% expected parents to co-sign on their mortgage, and 24% percent expected help covering closing costs. From the lender’s perspective, this is all very doable as long as the needed documentation is delivered and all other lending criteria (e.g., credit scores and debt to income ratios) are carefully met. Documenting financial assistance from relatives can be challenging if the borrower does not plan in advance, so here are some suggested “best practices” for home buyers who expect this help.
The “gifts of cash” concept covers help covering both down payments and closing costs, as mentioned in the survey. Parents and other relatives can give cash to cover all aspects of the buyer’s cash to close – down payment, closing costs, and prepaid escrow. To be approved, such gifts need to come from documented relatives, which includes parents, grandparents, siblings, and even aunts and uncles, along with spouses, domestic partners, and fiancés. From experience, I can report that underwriters will likely not approve gifts from nieces or nephews and not from ex-spouses, as the relationship has been legally terminated.
Underwriters expect gifts to be carefully documented. This includes a gift letter signed by both giver and buyer. The letter states that the money given is a gift, and not a loan. Loans to help buyers are prohibited. If the giver makes the gift using a check, the underwriter will want to see a copy of the check. And if the gift occurs before closing, the underwriter will want to see bank statements from the giver and the buyer showing the funds coming out of the giver’s account and into the buyer’s account. For some loan types, the giver may have to show proof of funds and document the source of any “large deposits” into the giving account. My preference for conventional loans is to have the giver wire the funds directly to the closing attorney’s escrow account. When this is done for a conventional loan, the only documentation typically required for the buyer and giver is the gift letter itself. It’s much simpler and less time consuming, so I recommend this approach when possible.
Relatives and even friends can co-sign mortgages along with the home buyer. (Yes, friends can co-sign…I recently verified this for a potential client.) To do this, we combine loan files for the buyer and the co-signer. As long as the combined file meets all underwriting criteria (credit scores, available cash to close, and combined debt to income ratio), underwriting will approve mortgages including the “non-occupant co-borrower.”
Do you know a young person who wants to end her expense-only monthly rental cost? Ask her if she is expecting an income tax refund this year. Then connect her with me. I’ll help her explore how best to fund a home purchase with that refund and assistance from family, if necessary.
