The Down Payment Assistance Trick Most Don't Know

Certified Mortgage Advisor
NMLS 1701021
Published 
September 8, 2020

A trick that we all need to know

Now, we're talking about a down payment assistance trick that most people don't know. I've done a lot of FHA loans and I didn't know about this until a couple of weeks ago. So we're going to talk about how you can use down payment assistance in a nontraditional way to avoid a lot of the costs and fees that come with regular down payment assistance.

Down Payment Assistance

First of all, down payment assistance is exactly what it sounds like it's assistance to help with your down payment, and a down payment usually can be a big struggle in entering into homeownership.

How down payment works

Now, down payment assistance is normally given by a local housing authority. That local housing authority is basically going to give you a grant or a loan. But the problem with that is, there are normally some extra costs involved. So even though you're getting assistance with the down payment, there are added fees to it, you also normally have a higher rate. So, let's say you get an FHA loan right now for 3%. With a down payment assistance program that might be closer to 4.5%.

So you're paying a lot of extra money to get that down payment assistance. And also you maybe have a certain period of years that you have to remain in the property. Some down payment assistance requires you to be in-home and not sell it or refinance for 5 to 10 years. So that can really prevent you from saving a lot of money if interest rates drop down even further.

Yes, loan from a family member

So when you don't have access to a down payment assistance program you might be looking at something as a gift from a family member. And most people are really familiar with getting a gift for closing costs. But here's the thing that a lot of people don't know: you can actually get a loan for your down payment, from a family member. Most people don't know this. If you talk to a loan officer, they probably don't think that this is a thing that you can do.

Secured or unsecured

So it can be unsecured or secured against the property as a second mortgage. So, effectively what a family member can do for you is they can give you a second mortgage for your down payment.

This is huge because this is down payment assistance, but it doesn't have all of the downsides of regular down payment assistance. So you don't have to pay any extra fees to a family member in this, unless they're going to charge that to you, which would kind of suck, but, no extra fees, no increased rate on that, and you don't have a limit on when you can refinance. So that a family member gets to decide what the terms of this new loan look like. So they could choose to charge interest. They could choose to not charge interest. They could choose, you know, maybe just one upfront cost really depends on what they want to do.

They could also secure it against your current home. So when you sell the property, they would get that money back. If it's unsecured, then you don't have to pay that money back when you sell the property, you just have to pay it back according to the terms that they give you. So this is huge because you don't have to go through normal down payment assistance as long as you have a family member, who's willing to give you that loan.

MRI

Also something interesting, and you'll learn through as you're exploring these different types of loans, you know, the whole mortgage world is, is weird. It has a bunch of random rules about things, FHA has this thing called MRI. It's the Minimum Required Investment. FHA basically says, hey, no matter how, the money that you bring to the closing table, no matter how much or how little it is, you always have to have a 3.5% minimum of the down payment sitting in your bank account. So even if your total cash to close is lower than 3.5%, you still have to have that money sitting in your bank account so that they can see you have a minimum required investment. It's a dumb rule. But, this is actually satisfied by a loan from a family member which is really huge.

DTI

Something else to keep in mind is it has to be included in the debt-to-income ratio. So this loan with your family member, let's say it costs you, you know, you worked out, so you're paying back your family member a hundred dollars per month, then that a hundred dollars per month need to be included in your debt-to-income ratio to calculate when you qualify.

Your loan officer will do this for you. But if you are trying to calculate your debt to income on your own, just keep that in mind, you'll need to put that loan amount monthly payment in there.

Cannot exceed 100% LTV

Also it cannot exceed 100% loan to value ratio. So the loan to value ratio is just a hundred percent minus your down payment percentage equals your loan to value ratio. So it's just the opposite of how much you're putting down.

So basically what this is saying here is your family member can provide a loan for the down payment, but they can not provide a loan for the closing costs. Alternatively, your family member can provide a gift for the closing costs, but they can't provide a gift for the down payment. Effectively, a family member could give you a loan for the down payment and then a gift for the closing costs. The difference is a loan obviously gets paid back and a gift does not get paid back. So strange thing there, just to reiterate, you can get a loan for the down payment, but you can not get a gift for the down payment. You can get a gift for closing costs, but you can not get a loan for closing costs. Those are the guidelines here.

Family member CAN borrow it

Also, a family member is allowed to borrow that money. So, you know, maybe you have somebody who, you know, maybe they don't have the money right now, but they're willing to go borrow it on your behalf so they can borrow the money then loan you the funds to have access to that money as well, which is kind of an interesting thing that you can do. It's helpful if you have a family member who's saying, Hey, I'm not willing to you know, go take this money directly out of my account. Maybe want to loan it from another source.

Now we're going to talk about who qualifies as a family member because not everyone qualifies as a family member.

#CalmMoment

But first, let's have a calm moment here. So when you're looking at buying a house, getting the down payment, can feel really overwhelming because there are all of these costs involved. You have the down payment plus all the closing costs and it can start to feel like things are adding up quite a bit. And maybe you don't have these funds saved up in your bank account right now, and that's okay.

It's all right to slow down. It's all right to take this moment and say, Hey, we're just trying to piece together: what does everything cost here? So if you're in that spot, it's okay. You can calm down and relax and take things a step at a time.

Don't rush

One word of caution that I would have for you is to not rush into this too quickly. A lot of times what happens is when people want to kind of dip their toe in the water. They don't realize that the water they dip their toe in is actually this like a surging stream. And it's easy to get caught up in the real estate world where you're starting to say, Hey, I'm starting to explore things.

And then all of a sudden we're going out and we're seeing homes and we're writing offers and things move a lot quicker than we expected them to. So if you're in that spot, don't feel like you have to move forward with things. You can take a step back, you can slow down. And if you're in the spot where you're feeling like, Hey, we don't have a lot of money in our account right now and you know, buying a house just seems like a big stretch for us. Then don't move forward with buying a house. Buying a home is not going to fix your financial problems. It's not going to fix the emotional problems you have, and it's not going to fix the relational problems that you have as well. A home is just an extra thing that we do. It doesn't solve problems in itself.

Who count's as family?

So let's talk about who counts as family because not everybody does. So this family definition counts for if you're getting a gift or a loan from a family member, this is how FHA defines family. So it can be a child, a parent, or a grandparent. A child is a son step son, daughter, or stepdaughter, a parent or grandparent includes a step parent grandparent, a stepparent step grandparent or foster parent or grandparent. It could be a spouse or domestic partner, legally adopted child, foster child, brother, step brother, sister, step sister, aunts, or uncle, and a son, daughter, father, mother, brother or sister in law. That's what counts as family notice, there's no cousins. It's only these people count towards providing a gift or providing a loan.

Alright, so this is a really great strategy that is going to help you come up with a down payment without using traditional down payment assistance if you need some help with your down payment, you can use a loan from a family member. Talk to your loan officer about that.

Talk with a loan officer
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