I don't re-blog many blogs, but Bill Archambault Jr. has added what I consider valueable information to my blogs Who Is An Acceptable Donor To Provide Gift Funds For A Mortgage? and Why Lease Or Rent To Purchase Agreement Is Not A Good Option? I have disabled the comments, so please stop by Bills blog if you have a comment you would like to make.
My friend George Souto just wrote another great article Who Is An Acceptable Donor To Provide Gift Funds For A Mortgage? On what acceptable gift funds you can use to finance a home. I am concerned about peoples/consumers and Agents not to mention less experience Loan Originators form unwarranted conclusions. George’s article is just the latest in a great series. Don’t miss Why Lease Or Rent To Purchase Agreement Is Not A Good Option Another great article which may well lead the novice and real estate hobbyists both Agents and LO’s to costly misconceptions. I’m on both sides of the rent-to-own, lease-option issue and published links to my stand first published about 1986, yes there was life before Active Rain.
In most states those that didn’t out law lease-options they remain a great and useful tool and very dangerous all at the same time.
Both gifts and options require exacting documents to be recognized by lenders and as a lender I’ve had to tell thousands that the lender didn’t recognize their "equity" or that they can’t use select gifts to qualify.
I reached a point where I would not tell the client or my LO’s about this anyway, but face to face.
The reason is that almost all peoples/consumers and Agents not to mention less experience Loan Originators erroneously concluded that they lost their equity or can keep the gift money! I’ve even heard gurus tell their students that the buyers will lose their money.
They couldn’t be more wrong!
Lender’s rules only affect qualifying for the loan not your contract to buy the property!
A lender may not recognizes your equity created by the lease-option, but your purchase price will still be determined your original option less the credits agreed to between the buyer and the seller in the option. You don’t lose your money! But, if the option called for a purchase price of say $200,000.00 with credits totaling $40,000.00 you don’t need an 80% LTV loan at $160,000.00, you need a 100% loan at $160,000.00 unless you have more to put down. You don’t lose you equity it’s just that the lender will use the lesser of purchase price or appraisal to determine the LTV of the loan you qualify for. To the lender your purchase price is what you are required to pay at closing! To everyone else your equity will be seen as the current market value less what you owe as you leave the closing!
Many a fool and even more morons have walked away from big money out of ignorance or stupid arrogance, refusing to pay the higher mortgage rates that come with higher LTV’s! In most cases these buyers need only hold higher cost loans for a few weeks or months before refinancing witch would be based on current market value. Even 6 to 12 months of very hard money could be very desirable rather than lose your equity! There is always more than one way!
Unacceptable gifts are even simpler to understand. Just because the donor isn’t actable to the lender doesn’t mean you have to give the money back! You’re going to have allot of expenses moving in to any new home, if you were generously given the money use it for non-loan related expenses. But, there is always a "but" you’re going to still have to document the money to establish that you are not required to pay it back. It’s your money it’s just not useable for loan requirements!
As long as we’re talking about documenting money out of town buyers moving to a new town can have the same problem with unacceptable funds! It common and good practice to imeatly open a new checking account locally, do it but with current funds not your purchase money. If you move the money with out the same document a gift requires you might not be able to use it either. Never, never, never, never close your old accounts until after the closing on your new house! A cross country wire transfer cost no more than across the street so avoid any potential problems.
Now go take your Agent to your LO by the hand (They may be kicking and screaming.) And make your new home a pleasant experience.
William J Archambault Jr
The Real Estate Investment Institute
firstname.lastname@example.org Cell 832-259-7078, Houston 832-582-8415, Las vegas 702-516-1569
From my past: GRI 1975, FLI 1974, Catalyst from a client 1974 an agent that makes things happen, REII, The Real Estate Investment Institute 1995.
©William J Archambault Jr ©The Real Estate Investment Institute ©REII