How much time should I wait between family loan and applying?

Question

We have $70,000 of credit card debt that gives us a very bad debt:income ratio. My parents are willing to lend us most of the money to pay that credit card debt off so that we can get a good cashout refi. But I know that banks want to know where big recent deposits came from and that they don't reflect new debts that need to be considered. The loan money from my parents is coming from their relatively small life insurance policies (they have bigger ones) that simply reduce the death benefit by exactly what we still owe, and so my parents don't care if we pay the money back or not. It will accrue interest (5.8%) until the total value of the policies is reached, and then the policies are basically made null. Or we might pay them off if our business has a good summer season. Either way, it doesn't affect my parents' estates or level of comfort much at all. Sorry so complicated. Anyways, how far back will lenders look at such big deposits? I can hold off on applying for a refi as long as I need to exceed this period of time. Thank you! And please don't judge me on the debt... We have paid off a LOT more than the current balance and have learned our lesson. We just hate to lose a chance at a refi with these low rates.

Bryan Schmidt · Answer

Jake,

It sounds like the limiting factor on your file will be a combination of debt to income (dti) ratio and loan to value (ltv).

There are many lenders out there but the majority of them have underwriting overlays that create more hurdles for borrowers to jump through.

You and every other investor needs to work with a lender that only underwrites to Fannie Mae, Freddie Mac, and Ginnie Mae's base underwriting guidelines.

All of that being said, for a conventional mortgage, Fannie and Freddie are currently limiting the maximum LTV to 80% for a cash out refinance on a single family home.  This number can potentially go up using a HELOC as a 2nd mortgage.

Also, depending on your middle credit score, the maximum DTI is 45% or less.

Of course, all of these calculations are based on the current fair market appraised value of your property.

If these ratios are too high or the appraised value comes in lower than expected, the lender could require the cards to be paid off at closing as a condition of final approval.

As far as the deposits are concerned, a "large" deposit can be seasoned in your bank account for a 30-60 day period to avoid having it become an issue in underwriting.  The timing of the deposit date and the statement cutoff date will determine how long you would have to wait before submitting your file to underwriting.

The better way to do this would be to have your parents pay the cards directly so there is no deposit to document for your file.

As far as life insurance is concerned - what Zach said!

I hope that helps!

-Bryan

Shaun Weekes · Answer

@Jake Springs

Have your parents pay off the debt from their accounts.  No paper trail this way.

Don't deposit large amounts into your account or you'll need to wait 90 to 120 days depending on when your statements come due.

Wait at least 30 days or for all billing cycles to come and go and then you'll be good to go.

Zachary Paschke · Answer

Oh, and about recent deposits- depends on the bank, but if they pick up on the big deposit you can get a letter from your parents saying it was a gift to pay towards the house (which sounds like the truth in your situation if they’re not requiring payment). If I remember correctly banks wanted like 2 months of statements in my case.

Zachary Paschke · Answer

I would ask around for a local mortgage broker. The rule for most lenders isn’t the rule for all lenders and a good broker will help point out companies that can help. You haven’t said which state your in so I can’t make any recommendations. Real estate agents should know some decent ones.

Be prepared for the fact that if your DTI ratio is high they may insist on issuing out some of your money directly to the credit card companies. Mine did this. I bought our rental with credit cards (not saying that’s a good or bad thing, but it worked for me - I simply used it as a short term loan). The mortgage company wrote checks to the credit card companies as a requirement of the loan. We didn’t care, because that’s what we planned on doing.

As far as your parents life insurance- you’re right you don’t have to repay the loans. If you at least pay the interest the policies should stay open. If the policies never paid a dividend (or if they haven’t had much time to mature), you may not have tax ramifications, but if you pull more cash out of the policy than you put in and let the policy surrender there could be some tax ramifications. Just be aware of that (not an issue for loans by themselves- just if the policy surrenders).

Hope that helps.