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.
Eric Lundberg - NMLS #261588
President, Chinook Mortgage Ltd - NMLS #261588
541.302.3210
www.ChinookMtg.com
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