Barbara Swafford of Blogging Without A Blog and Observation Mountain left a comment the other day on Part 2 of this series I felt required a more in-depth response than a quick comment.

She wrote the following:

One thing that I saw (as a Realtor) was when parents or a close relative would loan money to the buyers for a part of the down payment. If I remember right, any money that was loaned by others, had to be treated as a “gift”.Aren’t there also situations where the buyer agrees to pay more for the house (on paper), and then the seller agrees to pay the closing costs (and maybe the down payment?) out of the excess “proceeds”?

I’ve also heard of new carpet and/or new paint “allowances”. Does that “credit” get used as part of the closing costs or…, how is that handled? Or…….is that going to be covered in your next lesson?

The important thing to remember is every bank is slightly different.

Even if their *rules* are the same, there are different people on staff and each bank can be in a different spot both financially and regionally. Thus some may bend the rules a little more here and there, especially if they are needing your business and you have built up a little trust with them.

About Gift Money Being Used for Down Payments

Money people give you to help you purchase a home is considered a “gift.” This money wasn’t yours, it was someone else’s who gave it to you to help buy a house. Gift money usually comes from 3 places:

• Immediate family members
• Friends and extended family members
• Employers

Gifts from immediate family members

Mother, father, brothers and sisters are considered immediate family members. Banks are more likely to accept you using gift money from these sources over any other to be used as down payments and closing costs.

Gifts from friends and extended family members

If money comes from one of these sources, a friend for example, you usually need to provide a letter explaining what the deal is. Banks get nervous when other people give you money to buy a home.

Gifts by employers

Sometimes employers will contribute money for the purchase of a house when it’s part of a corporate transfer. As with all of the above, in this slow market where banks are going out of business because of foreclosures, some will go for it, others will say “no way.” It’s all up to the bank you use.

The best way to receive gift money to be used as a down payment is to get that money about 6 months before you apply for a loan and let it sit in your bank account. Banks typically don’t review your bank account’s money so far back and they will consider it your money. This could also be done using credit cards.

Why gift money makes a bank nervous

This is important for people looking for a mortgage to understand. Simply put, banks like to see you have invested something in the deal. If you get the seller to pay all your closing costs and a friend to give you money for the down payment, they feel you didn’t put anything important to you up for risk.

In other words, you have nothing to lose by walking away from the deal (foreclosure). The more risk you put on your shoulders, the better banks feel.

Keep in mind, too, that if you receive a large sum of money from someone, the IRS is gonna want to know.

Raising The Price Of The House So The Seller Can Make The Down Payment For You

Down payment-wise, this probably won’t happen, but like Barbara pointed out, it’s a great method to use in helping pay your closing costs. I’ll talk about that more in the next post.

Allowances

Like I mentioned above, every bank is different; some will work with you more while others are very strict and make you feel like just a number.

For those that don’t know, allowances are when a seller either discounts the property because it needs something (like appliances, carpet, paint, etc.) and/or pays that dollar amount to you, the buyer, so you can do the fix-ups yourself.

This pretty much never comes to the buyer as cash in their pocket. The money is usually first applied to your closing costs and then any remaining to be applied to your down payment.

If you’re buying a house and want to ask for an allowance, what you need to do is chat with your loan officer and tell them what you’re wanting to do. Armed then with your options available to you, you can submit an offer and if accepted by the seller, you know your bank will go for it.

Thanks for the comment, Barbara. As you can see, my answer was a bit too in-depth for a comment section.

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