Double Check Your Inputs

In the Planning & Building Consensus phase, you and your co-buyer(s) make decisions and identify inputs across three categories:

1. Participation
2. Property Criteria
3. Co-ownership Basics

When you apply for a mortgage, the lender will consider these inputs to:

(i) assess your creditworthiness

(ii) guide you to the mortgage of best fit

Several of the decisions you and your co-buyers make about Participation are things you need to make sure you’re firm on before engaging a lender. Some co-buyers resort to asking their Loan Officer for advice about these inputs, but the truth is that they are outside of the Loan Officer’s job description:

• Who will be on Title? (i.e., a co-owner)
• Who will be listed on the mortgage? (i.e., a co-borrower)
• Will you have any co-signers on the mortgage?
• Will you receive any financial assistance from friends or family for your purchase? (i.e., loans or gifts)
• Who will be an occupant of the property? Who will not?

These are decisions for you and your co-buyers.

⚠️ Caution

Loan Officers should not advise on certain decisions, though they often do.

Remember that Real Estate professionals, including Loan Officers:

• Are salespeople who get paid when a home purchase closes
• Are incentivized to sell mortgages and close deals above all else
• Do not generally have a fiduciary responsibility to you as a borrower

Some LOs are explicit about these issues with borrowers. One LO we’ve worked with said in confidence:

“Over my 19 years in the mortgage industry, I’ve seen clients give up because I simply can’t answer a question, even if I know the answer, due to the risk involved or the fact that I don’t hold the correct professional license to provide advice.

We don’t tell people ‘no’, we advise them on how to move forward. It’s a fundamental issue with the industry. Until we function as fiduciaries, we will have issues.”

We’ve seen LOs overstep:

🚩 Advising unmarried couples with disparate finances to drop a partner off the Loan, and sometimes Title.
🚩 Insisting a family member participates as co-borrowers or co-signers without explaining the risks.
🚩 Dissuading intergenerational households from co-buying sheerly because they anticipated extra work.

Note on Source of Funds

Before you apply for a mortgage, know that Mortgage Lenders are required by law to verify the source of your funds. Generally, funds must be seasoned before a mortgage transaction. That means they must sit in your bank account for a period--usually 60 days--to ensure these funds are stable and not borrowed.

Exceptions may apply. Expect any funds that haven’t been seasoned to be scrutinized by a mortgage lender.

ℹ️ Pro Tip

Consolidate all funds earmarked for your down payment and cash for closing, where possible. Consolidating monies helps to minimize the number of statements you’ll need to provide as proof of funds.

Note on Friends & Family Assistance

It’s common for homebuyers to receive financial assistance from friends and family in the form of a gift or a loan. In fact, over 1 in 3 first-time homebuyers receive financial assistance from loved ones towards their purchase.

Suppose you or your co-buyer(s) receive financial assistance from friends or family. In that case, do document this assistance properly and disclose the details to your co-buyers and mortgage lender. Do this for your protection and because it’s required by law if you’re applying for a federally-regulated mortgage.

Loans vs. Gifts

Funds provided to any co-buyer towards the purchase or ongoing maintenance of the co-owned home need to be documented, made known to all co-buyers and participants, and shared with your mortgage lender.

Loans are funds that must be repaid. Document these with a Promissory Note. Sometimes, friends and family rely on verbal agreements for loans. But when you’re taking out a mortgage, this is not a good idea. Failing to report the existence of private loans can violate the terms of your mortgage and give the mortgage lender the right to call the note (demand full repayment of the outstanding balance).

ℹ️ Promissory Note

A promissory note is a legally binding document that outlines the terms of a loan between two parties, specifying the amount borrowed, interest rate, repayment schedule, and other conditions. When friends or family assist in your home purchase, using a promissory note can formalize the agreement and protect both parties.

Gifts are funds that do not require repayment. Document these with a Gift Letter, and share this document with your mortgage lender.

ℹ️ Gift Letter

A gift letter is a formal document that confirms the transfer of funds from one party to another without the expectation of repayment. In a home purchase, it proves that the money received is a gift and not a loan. The letter typically includes the donor's name, relationship to the recipient, the gift amount, and a clear statement that no repayment is necessary.

We provide templates for the Promissory Note and Gift Letter at the end of this section for your reference. Keep in mind mortgage lenders may have their specific requirements.

⚠️ Caution

When friends and family fail to clarify the nature of participation, things can get ugly. The worst case involves a dispute that leads to litigation. Going to court is expensive, takes a long time, and can result in damaged relationships.

‍