A question that came up recently with one of our borrowers was whether she could borrower money to use for the down payment on an FHA loan. 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 of all 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
However, more importantly, your lender should review the documentation for the new loan and ascertain whether the funds are “unsecured” or “secured”. Neither conventional nor FHA loans will allow unsecured funds to be used for the down payment. So, in other words, 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 this Information Early
One thing to always remember is to make sure that you provide this 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.