Friday, March 14, 2014

Borrowed Funds for Down Payment

In many cases your buyer CAN borrow the money for their down payment.  The most important thing to remember is that the loan must be secured, they must document the value of the collateral and the lender must count the payment when qualifying.  The exception is we don’t have to count the payment if the buyer is borrowing against their own money ie. their 401(k).  It’s not uncommon for a buyer to tap their retirement account for the needed funds to close but it’s critical to do it right to avoid taxes and penalties.  

First, nearly every loan type allows for borrowed funds.  Buyers get in trouble when they take an unsecured loan or credit card advance and try to use those funds for their down payment only to have the lender deny their application.  Using a car as collateral for example is fine and the buyer has their down payment as long as they:

A – Don’t borrow more than the collateral is worth

B – Document the value of the collateral and terms of the loan

C – Prove that they actually own the collateral and

D – The lender counts the payment in their qualifying ratio’s

If the buyer is using their retirement funds and they can document that if they don’t repay that loan the lender (the retirement account administrator) will take the money from their retirement account rather than come after the borrower’s assets (like the house!).  This is usually standard procedure and documented in their loan agreement.

Even better, when a buyer borrows against their retirement account the mortgage lender will not count the loan payment when qualifying.  And, as long as it’s a loan and not a withdrawal there is no tax or penalty.  And though it should be obvious…when the buyer repays their retirement loan they are actually paying themselves back.  It was their money to start with!

More on the procedure for borrowed funds.  Your borrower will need to document that they own the collateral they are borrowing against.  Using the car example a copy of the title or registration will work.  Then you need to document the value of the collateral as well.  For a car loan it’s pretty straight forward.  I usually hop on the internet and look up the Kelly Blue Book value and print it out.  Get a copy of their car loan paperwork and it’s done. 

But what if your buyer has something a little more exotic to use as collateral?  The rule is they can use anything they can document.  From cattle to stocks to their antique Martin guitar.  Documenting the value gets a tad more complicated but it’s usually just a matter of getting a professional to give you an estimate of value (or your insurance company may be able to document the insured value).  Take that old guitar down to the local guitar shop and ask them to give you a written appraisal and you’re on your way.

Why wait and scrimp and live on Ramen noodles to accumulate a down payment only to watch home values continue to climb out of reach?  Have your buyer take stock of their assets and leverage them to get into the home of their dreams now. 

Eric Lundberg - NMLS #261588
President, Chinook Mortgage Ltd - NMLS #261588

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