FHA Gift Fund Question-Odd Situation

[Autumnslight]

I'm trying to get things in line to qualify for a new mortgage. As part of it, I need to sell a property that I currently own. The property was purchased by me several years ago, and I lived there with a roommate. I later moved out, and my former roommate has continued living there since then. We're interested in me selling the property to my former roommate. He would probably need to go with an FHA loan though, and we'd like for him to not have to pay any money out of pocket for the purchase.

I'm good with giving him a 6% concession for his closing costs, but I'd also like to cover his down payment, in return for various work and improvements that he has made to the property over the years. Our informal deal was always that if I sold the property, I'd give him some amount from the sale in return for what he's put in while he was living there. We can certainly pin down an amount and put that agreement in writing if need be.

I looked at the FHA guidelines, and I'm not totally sure if there's a way we can do this though with an FHA loan. I know that normally the seller is totally prohibited from gifting down payment money to a buyer, but what about when the seller is also a close long-time friend? "Rent credit" doesn't look like it would work, as he wasn't paying above fair market value rent to me. And "sweat equity" looks like it won't qualify if it was done before the sales contract?

He obviously needs to find a mortgage broker and talk to them, but I was just wondering if there were any ideas on how we could accomplish this?

[StartingOver10]

Your previous room mate can get a gift from one of his/her relatives. S/he can not get a gift from you since you are the seller. Don't travel down this road as it is considered mortgage fraud. I know you were just trying to think outside the box and get a little creative, but this is one of the things that is examined in underwriting - source of down payment funds.

Have your friend get a part time job and save up the funds OR have your friend get a gift from their relative OR have your friend sell items on Craigslist or Ebay and keep the evidence of sale (receipts, item listing etc) to source the funds. Use some creativity, but the funds can not come from you in any way, shape or form. BTW, 6% toward closing costs is entirely too much for you to pay. If it can't be done for 4% or less  then find another lender to work with for your friends loan.

PS - on the part time job situation, if your friend goes that way, the income won't be allowable in a FHA loan because he hasn't had it  2+ yrs, but if he saves that money, the savings can be used if they are seasoned. Some of the solutions require doing several things. Selling stuff around the house is an effective way to come up with down payment money. Make sure he knows each buyer and gets a name etc to prove that he sold items. Naturally the gift is the easiest. The donor has to sign a gift letter and provide a bank statement showing they had the funds to give the recipient.

[Autumnslight]

Definitely not trying to do anything fraudulent! But, I do need to give him some money from the sale, as that was our deal. I thought maybe there were some sort of special rules when the buyer and seller are related parties, but maybe that's only if they're actual relatives? I guess we can see if he can get a gift from a relative or come up with the down payment some other way.

The 6% isn't really excessive, given the area and relatively low purchase price. There are a ton of local fees, like transfer taxes and such, and the prepaids alone will be almost 3% of the purchase price.

[MovingForward_2012]

My landlord offered similar things to us but her mortgage broker told her that I would have to bring the money to the table at closing but then after closing my landlady could cut me a check for the "rent credits". I ultimately ended up buying a different house for our family that is in the underwriting phase.

Does your roommate have the cash on hand for downpayment and closing costs? If so, it is possible to reimburse him that amount after closing.

[StartingOver10]

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@MovingForward_2012 wrote:
My landlord offered similar things to us but her mortgage broker told her that I would have to bring the money to the table at closing but then after closing my landlady could cut me a check for the "rent credits". I ultimately ended up buying a different house for our family that is in the underwriting phase.

Does your roommate have the cash on hand for downpayment and closing costs? If so, it is possible to reimburse him that amount after closing.

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No - this is fraud. Don't get involved that way. FHA audits the files after closing.

[MovingForward_2012]

That is not fraud. It is after the closing transaction. People get large sums of money from family 1-3 months after closing! No where in the contract does it say, "After closing, you may only get funds from your paycheck every week." Once you are a homeowner, you can get gift funds from anybody 1 month, 3 months, 6 months, a year, etc after closing. This is not fraud as the transaction was closed with the buyer's own money. After he purchases, the requirements are to pay the mortgage, etc. NOT to refrain from receiving gift funds for X amount of months. That is not true. Giving the money to him after closing is NOT fraud!

[Autumnslight]

I can see where that would look a bit dicey and perhaps fraudulent, though it's certainly not the intent in this case. The amount I'm to give him honestly is just reimbursement for costs that he has put into the house in the past. Repairs, new flooring, painting, etc. The amount is definitely NOT the same amount of the down payment, nor is it determined in any way by the purchase price of the house. We can write it up formally, list out specifically what the amount is made up of, etc. It's not even actually meant to be for the down payment, but it would make a lot more sense if it could just be used at closing, since I would owe it to him anyhow, instead of having to pay out of his pocket, and then me pay him separately.

Again, I'll have him run it all past a mortgage broker, and see if there's any legit way that I can be allowed to give him any other credit at closinig. Otherwise, he'll just have to come up with the required cash at closing somehow. I'm hopeful he could get a gift from a relative. Then after closing, I could just pay him the amount we agreed upon for the reimbursement. Again, it wouldn't be the same amount as the down payment, or any gift he got, it would be determined totally separately. Hopefully that would be acceptable.

[cclee]

It is fraud, even if it is after close, they consider it to be incentive for the buyer to purchase from the seller.  Would they find out? Probably not, but it is fraud.  Autumnslight, gift equity can only come from a member of the family, like a parent selling to a child.

[JM-AM]

Just curious more than anything else.

Do you have a mortgage on the house now? Does the house have equity in it? Are you selling the house on your own? Is the house under water value wise?

While 6% seems high, it is reasonable as you would pay around 6% if using realtors. Another thing to consider is you are limited on the amount of credit you can give, but it varies for different reasons.

If you owe money on the mortgage you may not even break even once you offer 6%. You have to consider that the home has to be appraised and Lenders will only lend the lower of an appraised value or the sale price.

Just be careful if you try to do anything on the unethical side as it could come bite you in the end.

[Autumnslight]

Again, definitely not trying to do anything fraudulent or unethical! Not even remotely interested in getting into trouble with the government, LOL. But this does raise an interesting question. I legitimately owe him this money, albeit only via a verbal agreement. If I don't have the funds to pay him until after I sell, and indeed we agreed that I wouldn't pay him until after the property is sold (whether to him or to someone else), then how the heck am I supposed to pay him without it being an issue? And even if we agreed, and I had the funds to pay him before closing, AND he still came up with the down payment amount on his own, it sounds like it could still cause an issue since I'm also the seller? That just doesn't make sense to me. I understand if we were random strangers and I was just trying to get him to buy, but I've known him for over 13 years and we lived together in the same house for several years! Clearly I could reduce the purchase price by the amount owed, but that's not really a good option and that was not the deal.

In terms of equity and amounts owed, I've run some numbers. The purchase price is not solid at this point, as we're each having a professional come take a look and give an opinion, but potential numbers are:

Purchase price: $90,425, including 6% seller assist of $5,425.

No realtor commission

Mortgage owed: $62,000

Estimated seller closing costs (includes transfer tax): $4,100

Net proceeds to seller: $18,900

From his side, potential numbers would be:

Purchase price: $90,425, including 6% seller assist of $5,425.

Down payment: $3,165

Closing costs: $4,300

Prepaids/Escrows: $2,500

Borrower cash needed to close: $4,540

Those numbers leave plenty of room for me to pay him the agreed amount, which would actually be more than his cash needed to close. Obviously, the house would have to appraise for at least $90,425. Hopefully that wouldn't be a problem, based on what the trends in the area have been, but that's also why we're getting professional opinions beforehand.

This is all really stressful. :/