Borrowing Money from Relative for House Downpayment

[taubel]

Me again - back with more home buying questions! When we are ready to buy a larger house (we currently own a home), we will most likely want to get in a contract for another house before putting ours on the market. (Doing this has been posted in another thread, so I am aware of the risk of having two mortgages, etc. We won't do this until we can afford it!)

My father has offered to lend us the downpayment for the new house (probably about $50K so we'd be putting 20% down) until we sell our house. We'll have approximately $80 to $85K in equity once we sell our house, so we would then pay him back.

Questions is - what are the tax implications for this? I'm assuming somebody can't just "give" us $50K, even if it is just for a few months. Would my father have to be a co-applicant on the loan? 

Also, from your general experience (if you've done this) what are the upsides and the downsides? 

Thanks!

[Mosaic]

Actually, I think it's fine. We borrowed some money from MIL when it turned out that our savings weren't going to be liquid in time for the closing on our first house; we had the money, but there was an issue at the bank and we couldn't reschedule the closing for a day later because we had to buy by the end of the month, yada yada. Anyway, we paid her back about 2 weeks later when the dust had settled... no problems.

We bought our last house just days before we sold our old one, and we thought it was brilliant when the mortgage guy offered a home equity line of credit to get the equity out of the house so that we could put it down as the down-payment on the new one to cover that in-between time and avoid the stress we had the first time. Yeah, great advice THAT was! We took the money out of the equity line and put it in the bank so it would be liquid, then bought the new house and paid off the mortgage and the equity line immediately. Holding our own money for 2 weeks cost us over $1000!!! Ohmigosh, it was ridiculous and we won't do that again unless we have to.

So if you have a family member that you trust like crazy, and where they trust you like crazy, I would highly recommend using the Bank of Dad to float until you sell. A loan is a loan, no matter how big, what the interest rate is, etc., but that agreement is between the two of you. If you're nervous about it, you can write up a letter where your dad declares you credit-worthy and promises you a loan of $50k for the purchase of this house, but otherwise I wouldn't worry about it.

[CameronsMama]

Well, I'm no expert so I could be wrong, but I'm not sure you could get into a contract on a new house without selling your old one. When we sold our house last year, the lender told us we did not qualify for a loan for a new house unless we either had a contract on the old house, or a signed lease proving we had a tenant lined up. Unless you are wealthy enough to cover two mortgages, which (and please don't be offended by this- I'm just guessing here...) you likely aren't if you are considereing borrowing the down payment, you might not have the option to wait to put your house on the market.

You would have to ask someone who knows far more than I do about taking a loan or gift for the downpayment. Years ago DH and I considered loaning or gifting a down payment to his parents, and the bank said no go- can't use someone else's money for the down unless they are on the mortgage, too. As I said, this was quite some time ago, and things could have changed, or it could have been a policy unique to their bank...I have no idea, so I can't help much there. I do know that if its a "gift" you will have to pay taxes. Not sure how that works if it's a loan.

[rhiandmoi]

We borrowed money from our parents to buy our house. All we had to have was a "loan document" stating that it was a loan and not a gift, and when we were supposed to repay it by, and what the terms for repayment were. The biggest thing that the mortgage company was looking for was that there were no monthly payments.

[Poddi]

Sure, go ahead.   We lent my dad some cash for closing his new house a few years ago with no problem.  Banks didn't ask where he got that cash from.  The only worry would be if you'd qualify for two mortgages.  The banks nowadays would not want to take such risks, they expect you to prove you can afford both mortgages if the house doesn't sell for a while.  We did it once (buying a new house before selling the old one) and it was quite a bit of work talking to the bank, we ended up putting a much larger down payment (30%) on the new house than we intended in order to qualify for both. 

What I'm saying is I'd talk to your bank first and find out their magic formula on how much you can qualify.  Say if you can possibly qualify for $400k, and currently owe 150k, then the second house is no problem, especially with a 20% down.  If your upper limit is $300k however and currently owe 150k, that leaves you only 150k for the other house.  Even with 20% down that won't be enough, you might have to put 40% down in order to qualify.  Just an example.  I'm sure you know what you are doing. :)

[Sharlla]

we had to get a letter for FIL stating that the money was a gift.  he could not lend us the money or that would change our debt to income ratio so much that we would no longer qualify for the loan.  the was true for both a fha and traditional loan.  any money we had in the bank had to come from somewhere so we had to show proof of income and deposits.

[velochic]

The limit without tax implications is $13,000 per person, per year.  If he gifts you money above that, you will pay gift tax on it.  If he "loans" you the money, it will change your loan qualifications.  I think there are better options, such as selling your house first as a pp mentioned, rather than borrowing a down payment for a secondary residence (which, btw, will be harder to get than a primary mortgage).  Good luck!

[rhiandmoi]

Originally Posted by Sharlla 

we had to get a letter for FIL stating that the money was a gift.  he could not lend us the money or that would change our debt to income ratio so much that we would no longer qualify for the loan.  the was true for both a fha and traditional loan.  any money we had in the bank had to come from somewhere so we had to show proof of income and deposits.

For us all we had to do was have the loan document say that no monthly payment was due, and that the lump sum was due at the sale of the home.