Sometimes clients ask about getting loans from family for their down payment. This blog post overviews the rules for this arrangement and copies guidelines from Fannie Mae. Fannie Mae and Freddie Mac makes the rules for conventional conforming loans. This blog post does not get into all the detailed subordinate financing rules which are much more extensive.
B3-4.3-15, Borrowed Funds Secured by an Asset (10/30/2009)
Borrowed Funds Secured by an Asset
Borrowed funds secured by an asset are an acceptable source of funds for the down payment, closing costs, and reserves, since borrowed funds secured by an asset represent a return of equity.
Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, or financial assets, such as savings accounts, certificates of deposit, stocks, bonds, and 401(k) accounts.
Secured Loans as Debt
When qualifying the borrower, the lender must consider monthly payments for secured loans as a debt.
B2-1.1-04, Subordinate Financing (12/04/2018)
Subordinate liens must be recorded and clearly subordinate to Fannie Mae’s first mortgage lien. Lenders must disclose the existence of subordinate financing and the subordinate financing repayment terms to Fannie Mae, the appraiser, and the mortgage insurer.
|Unacceptable Subordinate Financing Terms|
|Mortgages with negative amortization|
|Subordinate financing that does not fully amortize under a level monthly payment plan where the maturity or balloon payment date is less than five years after the note date of the new first mortgage|
In summary though, if a buyer is putting down 5% of their own funds and wishes to borrow with conforming financing, they can get a secondary loan from family provided it’s secured against an asset that justifies the loan. For instance on a $500,000 purchase with a buyer putting down $25,000, some of the financing can come primarily from a conforming loan and some of the financing secondarily from a family loan. This family loan must be at a reasonable interest rate with repayment terms meeting Fannie Mae’s subordinate financing guidelines.