In this second of a two-part series, Mark Wells of Preferred Financial Services answers customers’ questions regarding down payment funding:
The house I am buying is worth more than I am paying for it. Can I use the equity as down payment? The answer is “no” for all programs, except in a “non-arms length” transaction—when you are buying the home from a near relative, a spouse, or from an estate in which you have an inherited interest.
Are there any restrictions regarding non-arms length transactions? For a conventional loan, if the equity being transferred to you is less than 20 percent of the value of the house, you will have to show that you have 5 percent of your own funds that could go towards down payment, following the rule of gifted down payment. But you won’t have to actually bring the 5 percent down payment to the closing—you only have to show that you have the funds in hand to make the down payment and the lender will allow the equity credit to be included on the closing statement as your down payment.
Are non-arms length rules different for FHA loans? Yes. In an FHA “Identity of Interest” transaction (their term for a non-arms length transaction), FHA will only fund 85 percent of the value of the house. So if the amount of equity being transferred to you in the property is 15 percent or more, you will need no down payment. But if it is less than 15 percent, then you will have to make up the difference with down payment funds.
I am going through a divorce and need to buy out my spouse’s portion of our house. Do I have to have down payment to do that? If you are not currently on the deed, then the transfer of the property into your name will be a purchase transaction, and non-arms length rules will apply. If you are currently on the deed, then this transaction will be a refinance loan and the lender will allow you to refinance with cash out to buy out your spouse. At the closing of the refinance, your spouse can be removed from the title to the property. The only limitation to the refinance transaction is that the loan cannot exceed 90 percent of the home’s value.
My husband’s credit isn’t good, so he will be on title to the house we are buying but not on the loan. Our down payment funds are in a savings account is in his name. Will he have to “gift” the funds to me and have gift rules apply? I don’t have 5 percent of my own funds to put down. Because he is your spouse, they will not consider this a gift and this can be the source of your 5 percent down payment. As long as your husband will be on the title, he can write out a letter stating “My wife has full access to, and full use of the funds contained in my bank savings account # —–.”
Wells welcomes questions or comments and can be reached at (864) 235-9596, or by e-mail at Mark@TheGreatestRates.com.
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