Cash is a key ingredient in many real estate sales, and yet money up front is not always necessary to cement a deal. Indeed, a number of real estate strategists recommend buying without cash if possible.
What happens if you're a buyer with enough income to support mortgage payments but too little currency on hand? Or, how can you boost your credit standing if you have saved your dollars but have limited earnings?
A large portion of all real estate transactions may be described as "assisted" sales, those in which a buyer without sufficient cash or adequate credit receives material aid from an individual or institution that has no claim against the future appreciation of the property. Families, friends, the VA, FHA and private mortgage insurers are among those who may render such aid.
The help of friends and family in a real estate deal most often comes in the form of cash gifts or the extension of credit, acts of generosity that must be viewed with some care.
For the protection of buyers, sellers and lenders, a "gift" should be viewed as something more than a passing oral comment by Uncle Bob or whomever to come up with $15,000 if you ever purchase real estate. A gift commitment is truly a gift when it is:
Irrevocable. A "gift" that can be taken back is not a gift.
Free of consideration. A "gift" on which one pays interest, where repayment in whole or in part is expected, or where other valued consideration is anticipated is not a gift.
Available. A gift that is not in hand by settlement may cause the forfeiture of a deposit because the deal cannot be completed.
Binding. What happens if a gift commitment is made and the donor dies before the gift is delivered? Gift commitments should be binding on heirs, executors, administrators, successors and assigns.
Contingent. A purchase that is dependent on the delivery of a gift should be structured so that, if the gift is not received by a given time and date, the sale is off and the deposit of the purchaser will be returned in full.
Carefully thought out. Sizable gifts may involve significant tax questions that should be reviewed by an attorney and/or a tax authority prior to any commitment. For instance, will the donor be forced to pay a gift tax? How will a gift affect the recipient's tax basis in the property? It may be that an outright gift is not the best approach in certain cases. Rather than providing a large bundle of cash up front, some donors instead may take back a mortgage, which they then can partially forgive each year.
Some purchasers have managed to accumulate enough cash for a real estate purchase but lack sufficient income, at least on paper, to qualify for a mortgage. In such situations, a cosigner with good credit may participate in a sale.
A lender will want a cosigner to repay any portion of the loan that is in default above the value represented by a foreclosure sale. Often, lenders will want a creditworthy individual not only to be a cosigner but also to be on the deed as a co-owner. The reasoning is that, in the event of default, the lender can pursue the cosigner.
The possible problem with a cosigner as co-buyer is that this is not truly the relationship that many families or friends envision. Also, a cosigner on the deed may endanger the ownership of the property--and the lender's interest--if the cosigner goes bankrupt or is forced to pay a liability claim. With a cosigner as a co-owner, both buyer and cosigner would be wise to have an attorney draw up an appropriate agreement outlining the relationship between the parties and resolving potential estate issues as well.
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