Co-Signors and Gift Letters – Impact on the Real Estate Transaction
Saving for a downpayment and closing costs is often very challenging for first time homebuyers. Income levels, as well as school loans, often affect a first time homebuyer’s ability to qualify for a mortgage, necessitating financial help with a home purchase. Depending on the loan program, buyers may be able to get assistance with their purchase if they have a co-signor or a gift.
The buyer who needs to have a gift or co-signor needs to realize that the lender will require documentation for the financial ability of the donor to make the gift or co-sign. A co-signor will essentially have to qualify to co-sign the loan.
Where there are often problems with financing where a gift is needed or there is to be a co-signor, is when the party is unwilling to provide their private information, or if the co-signor doesn’t realize that they don’t “qualify” to co-sign the loan or that the gift can’t be verified. Co-signors also need to realize how co-signing a mortgage can affect their personal finances going forward. The co-signed loan impacts their credit as they will be fully responsible for that loan in addition to the buyer, and also can impact credit scores. If the co-signor seeks a loan for another purchase such as a home or car, the loan will count in the debt ratios possibly affecting their ability to qualify.
Buyers need to ascertain upfront that the gift donor or co-signor loan documentation can be provided to prevent problems with obtaining final loan approval, and that the parties providing the assistance have been made aware of what will be required of them, how co-signing can affect their personal finances, and are willing to comply with the lender’s requirements. Buyers and agents should also be aware that gift letters and co-signors can hold-up or, in worst case, prevent the buyer from getting loan approval.