The Veridian Blog

Clients Jimmy and Joanne are looking to purchase a house by putting 20% down.  In order to benefit from the lower, traditional conforming interest rate, Joanne’s father Ed wishes to lend them an additional 20% so that they only have to borrow $417,000.   Ed intends to execute a promissory note and record a proper Deed of Trust in the same escrow transaction.  What problems will Jimmy and Joanne face from the mortgage lender?

Wholesale lenders, for the most part, will not lend in front of a private party mortgage holder.  Jimmy and Joanne are much better off receiving the extra money as a gift.  All Ed would have to produce is a gift letter and possibly document the source of funds.  If Ed isn’t feeling that altruistic however, he may want to opt for a different strategy that offers him more protection.  For the extremely savvy and cunning buyers, they can structure the extra funds as a gift and still execute a promissory note (without recording a Deed of Trust) outside of close of escrow to support reported income and interest deductions for the respective parties.  However, that’s an IRS issue I’ll stay away from right now.

If the buyers can qualify without the parental funds, they may want to alternatively consider qualifying without it first, then executing the Note and Deed of Trust after close of escrow.  That strategy doesn’t take much extra time at all, and more importantly eliminates lender involvement and doesn’t jeopardize the purchase transaction.  All the buyers need to do after they own the house is sign the promissory note and Deed of Trust, and send the DOT with a PCOR to the applicable county with a small fee for recordation.

For more insights on this particular scenario, please email me!