Q: I am purchasing a condominium unit, and have 45 days in which to obtain financing. A savings and loan association has sent me a loan commitment letter that states: "no secondary financing permitted."
The purchase price of my unit is $95,000. I am borrowing 75 percent, but frankly, I do not have the remaining 25 percent for the cash down payment.
Many friends have been going to settlement and then recording a second deed of trust two or three days later.
I was planning on borrowing $10,000 from my parents and preparing a second deed of trust in their favor to secure their note.Is this permissible?
A: Right or wrong, mortgage lenders should be able to impose reasonable conditions on the money they are lending. One very common requirement is that a borrower put down in cash (called equity) the difference between the amount borrowed and the purchase price of the house or condominium unit. The reason given by mortgage lenders for this requirement is simple. If the lender is forced to foreclose on the property because of non-payment of the mortgage loan, the lender wants to be satisfied that the house will at least be worth the amount of the loan.
In the absence of some form of insurance covering the difference between the loan and the sales price -- usually offered through the Veterans' Administration or by a private mortgage insurance company -- the cash down requirement by lenders is reasonable. I recognize that it does not take into consideration the rapid escalation of prices in the WASHINGTON METROPOLITAN AREA, BUT NEVERTHELESS IF YOU WANT THE LENDER'S MONEY, YOU HAVE TO FOLLOW THEIR RULES.
Thus, if the lender is requiring that you put down all cash, you would be in violation of the terms of the agreement if you were to secure your parent's loan with a second deed of trust.
I recognize that many people are ignoring and attempting to end-run this type of requirement, but I also understand that a number of lenders are beginning to "spot check" to determine whether any second mortgage has been placed on the property. Thus, I cannot legally recommend that you use any such subterfuge.
Your case does not create that much of a problem, however. Rather than secure the loan from your parents, have them treat this as a gift to you, and then the lender's requirements will have been fully met. If you want to voluntarily repay your parents, this is certainly your prerogative.
One additional suggestion. Discuss the matter with the lender. They may be willing to waive or modify their requirements to permit the second trust in favor of your parents.
It should be understood that because people have been successfully avoiding lender's requirements in the past does not mean that they will continue to be lucky in the future. I cannot condone this practice -- especially since lenders have the right to rescind the transaction and call their entire loan, if you have not been candid with them.