“A family friend wants to buy his first house and has asked me to help by adding his name to my bank account. His broker told him this would help secure a better loan and will pose no risk to me. I would like to help my friend–who I trust to be responsible–but I am less sure of the broker. What would you counsel?”
I wouldn’t do this for my closest buddy, because it would place our friendship at risk, and requires me to participate in a fraud. I would either gift him the money he needs, or counsel him to wait until he can save it himself.
The broker is mistaken when he says that placing your friend’s name on your account poses no risk to you. Even though you are certain he is not going to run off with your money, what happens if he doesn’t have enough money to close? One of the problems with our mortgage system is that no borrower can be exactly sure what the final tab will be until closing, which is why the lender wants to see that your friend has some extra money available.
If the transaction goes down to the wire and it turns out he needs another $500 to close, will you say “No”? If so, better to say “no” now, and explain why, because if you have to say it later, it would certainly end your friendship.
If your friend crosses you and uses your money to close without your consent, you will feel betrayed. On the other hand, if the deal falls through because you won’t give your consent and your friend won’t proceed without it, he will never forgive you. He will blame you (with good reason) for allowing it to proceed as far as it did.
Even if you accept the possibility that your money might have to be used, and can agree with your friend on a repayment arrangement, I think it is a bad idea. Your friend would be committing a fraud against the lender by claiming to have funds that he does not in fact have, and you would be aiding and abetting that fraud.
WILL BONUSES ALLOW ME TO QUALIFY FOR A LARGER MORTGAGE?
“I am planning to relocate to a new job, which has a much lower salary than my current one but a high bonus potential. Counting the bonus, I will be making more overall on my new job. Will I qualify for a larger mortgage?”
No, you will qualify for a smaller mortgage based only on your lower salary – until such time as you can demonstrate that the bonuses are a reliable source of income.
In qualifying borrowers, lenders are interested in the income that can safely be assumed will be available, not income that might or might not be available. So if you leave a job that pays less but has a large potential bonus, the income your lender will accept goes down.
If you hold the new position for some time and can demonstrate that the bonuses come in regularly, then the lender will accept them as part of your income. But the burden of proof is on you to convince the underwriter.
IS THIS LENDER GIFTING THE BORROWER?
“If I close on May 1, why does the lender allow me to go until July 1 before making the first payment? What does the lender get out of it?”
I imagine it is done to generate good will. However, your unstated premise that the gesture costs the lender is unfounded.
If you close on May 1 and your first payment is due July 1, there are two possibilities. The first is that you pay interest for the month of May at closing, and you pay interest for June on July 1. In this situation, the lender collects all the interest that is due and has given away nothing.
The second possibility is that you do not pay interest for the month of May at closing but your first payment remains due on July 1. In that event, the lender is adding the interest for May to your loan balance, so you will be paying interest on it for as long as you have the loan. The lender is giving away nothing here, either.
Lenders are not known for bestowing gifts on borrowers at closing.
The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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