Although this is generally not prohibited, there are a few important factors to keep in mind if you are planning to use borrowed funds for the down payment on a home.
The Mortgage Application
First, your lender should make sure that the new loan amount is properly added to the liability section of your loan application and that the monthly payment is included in your debt-to-income ratio. As long as you are not already approaching the upper limit of your debt-to-income ratio for the applicable loan program, adding in the new debt should not affect your qualification. Most lenders will also require that a credit supplement be obtained to add the new debt to your credit report.
Secured or Unsecured Loan for the Down Payment
Your lender will review the documentation for the new loan and determine whether the funds are “unsecured” or “secured”. Neither conventional nor FHA loans will allow unsecured funds to be used for the down payment. So, you must pledge some type of asset as collateral for the new loan, such as a vehicle, so that the loan is considered secured. In this case, the underwriter will most likely consider borrowed funds to be an acceptable source of down payment.
Down Payment Assistance Programs
There are also various down payment assistance programs offered by nonprofits and government entities, such as the county, which will provide “borrowed” funds for down payment. These programs vary, depending upon the entity that is offering the assistance. Your lender will want to make sure that the agency that you are applying to for down payment assistance is approved by the lender and that the loan program that you are applying for allows for a second loan on the property. In this case, these are also secured funds as they will be secured by the property you are purchasing.
Provide Information Early
It is important to make sure that you provide all information to your lender early in the process.
There is a question on the mortgage loan application that asks if the funds being used for down payment are borrowed. If that is the case, make sure to respond “yes” and immediately provide the supporting paperwork to your lender to ensure that the proper steps are taken early on to prevent possible complications later on.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in mortgages for first-time homebuyers, conventional home mortgages, refinance loans, reverse mortgages, and FHA, VA, and USDA mortgage options. In addition, we’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.