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CAN YOU PAY CAR LOAN AND OTHER DEBTS WITH GIFT OF EQUITY
Can a gift of equity cover not just down payment/closing costs, but paying off an auto loan at closing to get my son’s DTI to qualify?
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1 Reply
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Certainly! A gift of equity can pay for more than just the initial payment and closing costs. It can be used to clear any debts, such as an auto loan. Paying down debts with a gift of equity will lower your son’s debt-to-income ratio and enable him to qualify for a mortgage. However, several important factors must be considered:
Important Considerations:
Lender Guidelines:
Lenders usually have their own rules about what kind of gifts are acceptable. Typically, they allow gift funds to be used for the down payment and closing costs. However, using a gift of equity to pay off debts like an auto loan might not fit all lenders’ policies. Therefore, checking if the lender allows this gift fund use is necessary.
Gift Letter:
The individual giving the gift of equity has to write a letter stating that it is indeed a gift and not a loan that has to be paid back. This satisfies the requirements set by lenders.
Proper Documentation:
It must be clearly shown how exactly this ‘gift of equity’ transaction is being used. This means everything has to be documented very well. Bank statements and gift letters themselves are important documents that need to be in order and complete. It is important to break down where each part would go (DP—down payment; CCs—closing costs; DPO—debt payoff).
Loan Program Restrictions:
Different types of loans have different rules regarding gifts from family members or friends toward someone’s purchase price (FHA-insured mortgages vs. conventional loans insured by Fannie Mae). For instance, FHA-insured mortgages tend to have more flexible provisions on how such gifts should work. Always consult your loan officer before making assumptions based on this alone.
Impact on DTI:
If permitted by their lender, utilizing said ‘gifts’ could positively affect the DTI ratio. Thus improving qualifications when applying for mortgage loans here in America.
Next Steps:
Talk With The Lender: Confirm if the gift of equity can pay off the car loan.
Get A Gift Letter: Ensure That The Donor Gives A Proper. Gift Letter
Coordinate The Transaction: Work closely with your mortgage lender and closing agent to ensure all documentation is in order. Double-check that the gift of equity is applied correctly.
By following these steps and working closely with your lender, it may be possible to use the gift of equity not only to cover the down payment and closing costs but also to pay off the auto loan. This would improve your son’s DTI ratio, thus helping him qualify for the mortgage.