Home Buying in Denver>Question Details

Itiswhatitis, Home Buyer in Denver, CO

Will I need a co-signer?

Asked by Itiswhatitis, Denver, CO Fri Jul 6, 2012

I have perfect credit about 40 accounts of credit paid off in full or in good standing (all student loans paid off, 1 car paid off, etc), but low reported income from self employment (about 40k/yr) and a down payment of only about $10,000 available. I can obtain $50,000 towards a down payment in a self cancelling note at the AFR so would have $60,000 for a down payment. I want to purchase in the range of $350,000-$380,000. Will I need a co-signer as well. No significant assets.

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AFR is the Applicable Federal Rate...all it really means is that when you get a large gift, in order for it not to be taxable on either end, it can be done as a self cancelling loan at a mandated minimum interest rate, the AFR. Basically, it's not a loan, a gift, but it is called a loan for tax purposes and is carried out procedurally as a self cancelling loan over time. Technically it is a loan at the AFR but some look at it as a gift.

Google the term Applicable Federal Rate with "estate planning" and you will learn a bit. I am trying to learn about how banks will view my situation and I figure all of you brokers out there have a good idea.
1 vote Thank Flag Link Fri Jul 6, 2012
BTW: you have a good price point, but also reference FHA below. So am guessing you are considering some attached dwelling options. With your price point, if you are flexible on the location, there are many single family options out there - houses can appreciate better than condos over time.
0 votes Thank Flag Link Mon Jul 9, 2012
Itiswhatitis,

Thanks for the info on the AFR. That is a new one on me. We often learn as well as give information on this Trulia site. The bottom line is that if you are looking to purchase a home in the range of $350,000 to $380,000, you will probably need a strong co-signer. If there is a flexible, non-conforming portfolio lender out there who will look at your entire situation there may be a specific program that works for you.


Robert McGuire ASR
Broker/Consultant
Your Castle Real Estate
1776 S. Jackson St. #412
Denver CO 80210
Direct – 303-669-1246
http://theRobertMcGuire.com
0 votes Thank Flag Link Fri Jul 6, 2012
Good info on the AFR. I still recommend talking to a mortgage professional to qualify you for your specific situation. If you have that strong of a co-borrower, there should definitely be a loan for you.
0 votes Thank Flag Link Fri Jul 6, 2012
Oh, also, two of the properties I am interested in are not FHA eligible. It is a big reason I am interested in them because their property value will likely increase immediately once FHA approval is given. They are both very near the minimium owner occ for FHA eligibility and meet all other requirements.
0 votes Thank Flag Link Fri Jul 6, 2012
FHA approval might not impact the projects like you hope. Especially if they are dealing with occupancy issues. I would be cautious in believing a project not eligible now for this reason would be at some point in the future. More over, while it used to be very straight forward and relatively easy to get FHA approval, it is now extremely difficult, time consuming and thankless task. I helped a community reinstate their FHA status (occupancy was NOT an issue) and it took ninety days and was more difficult than doing a short sale.
Flag Mon Jul 9, 2012
0 votes Thank Flag Link Fri Jul 6, 2012
Also, I have been self employed for 3 years and have tax returns to support it.
0 votes Thank Flag Link Fri Jul 6, 2012
I am not worried about what type of cosigner I would need, just whether or not I would need one. The potential cosigner in this situation would qualify for pretty much anything. I am just wondering if because of my self employed status, low income (40k), and lack of assets if I am going to need a cosigner even with 60k down.

I am pretty sure based on my understanding that the $50,000 would be not be viewed as a second loan by a bank bc it is self cancelling and non revocable.
0 votes Thank Flag Link Fri Jul 6, 2012
Itiswhatitis,

You should speak with a tradational lender to get an understanding of where you are with purchasing with your situation. Then you should talk with a 'portfolio lender' like Compass Bank or one of the other local banks. The will look at you whole financial situation and have different guidelines that FHA, Fannie Mae and the other traditional lenders. I think we are all wondering what an AFR is. Is this something like a 401K that can be accessed for funds to apply to housing? Best of success with finding the 'right home for you. Let me know if I can be of assistance with that part when you get your financing peice in place.


Robert McGuire ASR
Broker/Consultant
Your Castle Real Estate
1776 S. Jackson St. #412
Denver CO 80210
Direct – 303-669-1246
http://theRobertMcGuire.com
0 votes Thank Flag Link Fri Jul 6, 2012
Hi, A couple of issues to look at, even if you had 2 years tax returns that showed your income of 40k/yr, this would not be enough to qualify for that high of a loan amount. Even if no other debt showed on your credit report your debt to income is well over what any lender can approve. The other issue is you would not be able to use the $50,000 for down payment because you can't use borrowed money as down payment. You are basically trying to get a loan, which is borrowed money, by using other borrowed money as a down payment. This, in the eyes of the first lien holder, would be considered a 2nd mortgage as it could be a lien against the property you are purchasing.

Next, if you had a co-borrower, you need to make sure this co-borrower will help in qualifying. Since you would have to count all of their debt as well to qualify. So if their income is good, but they also have debt, they may not be helping you. Also, if the co-borrower is not going to occupy the house, there are other layers of qualifying that you need to meet on a conventional loan, or you would need an FHA loan. For FHA you would need to make sure you are within the loan limits based on the county you are purchasing in.

Lots of obstacles to over come. I have a great mortgage person you can talk. The only way to really know is to apply for a loan and have the lender review all of your information as well as the co--borrower. You can contact me at 720-937-6528.
0 votes Thank Flag Link Fri Jul 6, 2012
According to your income, it sounds like your mortgage payment on the price you want to purchase would be more than 50% of your income. Is there a reason you have chosen that price range, i.e. a certain home or neighborhood? It is just as important to help you buy a home you can afford to keep as it is that you are happy with the home you purchase.

Your payment will be decided based on your credit score and several other factors. It is best to make a loan application with a lender 1st to see what you qualify for and what your payment would be before deciding a purchase price and down payment considerations. Any reputable lender can do a prequal with you over the phone in a few minutes. Once you have completed that, then you could look at purchase price and down payment options.

Ray is correct in that you cannot borrow the money for a down payment, however you can receive it as a gift. Down Payment funds will require for you to show where the funds came from for you to be able to use them to purchase a home. It may be possible to use funds from an asset you sell, but again you will have to show the source of the funds.

You can search my website for available properties that may work for you at http://www.coloradohomes.biz or call me with any additional questions you may have.

Amber Pleiss
Pleiss Realty & Associates
Broker/Owner
303-638-3633
0 votes Thank Flag Link Fri Jul 6, 2012
This sounds like the perfect FHA case.

Coborrower would be allowed to help bump up your income to qualify. Your assets are purchasing the home, so no worries that the coborrower is lacking assets.

The down payment must be documented. The AFR note (not sure what that is) must be documented with evidence that you did loan the money out (evidence of your cancelled check) and the note payers ability to repay in one lump sum to you (copy of their bank statement) and their cancelled checks to you if it has been being paid in installment. Basically, any documentation to demonstrate this was a loan.

FHA has a minimum down payment of 3.5%. On $380k, you would require $13,300 down and cc of about $10k.
0 votes Thank Flag Link Fri Jul 6, 2012
As a lender knowing you are self-employed tax return review is a must. Without this, you are throwing darts at a board and are blindfolded.

Second, the information about the down payment, if you borrow $50,000 (not sure what/who AFR is) that is not likely an eligible source for down payment funds. Unless this is securitized collateral off an asset you own, even then the payment from that new debt has to be counted against you. My question to you is can you afford this payment that will come with this mortgage even if you can qualify, because with those down payment levels, PMI is likely a part of your monthly payment?

After that qualifying self-employed borrowers is a tax return review must, and no less. And a full review of credit report with scores as well. I have seen too many self-employed borrowers who make a certain amount, but their effective income is written off to loss.

Ray Williams
Branch Manager
Summit Mortgage Denver
rwilliams@summit-mortgage.com
0 votes Thank Flag Link Fri Jul 6, 2012
I think you are going to have all sorts of problems and suggest you need to discuss this with a mortgage lender or two and see what they can do for you. Being self employed means a couple years of IRS returns will be needed to see your income. Borrowing money for a down payment is always a problem too.
0 votes Thank Flag Link Fri Jul 6, 2012
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