For those buying their first home, one of the biggest challenges is coming up with a down payment. Closing costs, cash reserves, appraisal fees, and inspection costs all can add up and a lot of times new homeowners or first-time buyers will have a family member cosign on the loan. But what if you don’t have a family member that will do this? Are there other options?
The FHA loans are very popular with first-time buyers because of the 3.5% down payment. This is a much more doable figure than 10% or even 20% on conventional loans, but some first-time homebuyers may not even have that. Think about it; on a $400,000 home that still a $14,000 down payment. When cosigning, it has to be extremely clear that the payment history on the new mortgage will be reflected on of the cosigners credit report along with the buyers. If the buyer stops making payments it will affect the cosigner and could seriously affect a good credit report or score. If all payments are made on time a positive entry on both credit reports and positive credit score increases can help both parties. But also, late payments will have a negative mark on both signers as well. So are there other options?
Family members may be able to provide a gift fund for closing costs or even down payment as long as they don’t have to pay it back. This is extremely common when parents want to help out there adult children’s desire to buy a home. Parents can give the needed funds to close on a home with no expectation or requirement of repayment. These gift funds must be accompanied by a letter stating that the borrower does not have to pay back this amount. By turning it into a loan, it will affect the borrower’s debt to income ratio and could affect their interest rate or even the possibility of obtaining the loan at all.
Family members may also choose to pay off any outstanding debt as a way to help the borrowers get a better interest rate or terms on the mortgage. This might be paying off a car loan or student loan and this will reduce the monthly debt ratios allowing the buyer to qualify for more.
Again, cosigning is usually the most common way but there are other options if the cosigner doesn’t want their credit score or report to be affected at all. This is something you should discuss with your lender or mortgage officer and all parties involved to find the best situation for everyone involved.