Forgivable Loan for First Time From Employer

5 Replies

Looking for the loan experts on BP to answer a mortgage question.

The company my wife works for has a program where they give first time home buyers money toward their down payment in the form of a forgivable loan. The company wires the funds directly to the closing attorney's escrow account and the employee pays the taxes out of their paycheck.

Recently an employee, who had enough money for a traditional 20% down payment, had mortgage broker tell them that they would need to use and FHA loan vice a conventional 20% down loan in order to get the funds. Their concern is that with an FHA loan the PMI (upfront and annual) makes this offer from the company less attractive. This program has existed for a few months and this is the first time a broker has brought this up.

My gut feeling is to take the FHA loan using the funds from the company, pay the upfront PMI (which is way less than the company's loan), make my first mortgage check have a principal payment that brings me over the PMI threshold, and then request PMI cancellation. However, I know that's a rough around the edges answer and wondering:

-Where does a forgivable loan fall in the gift/loan spectrum of underwriting?

-Who is correct, this broker, the other loan brokers, both, none?

-How would you handle this situation?

Thanks for your help.

Originally posted by @Bill F.:

Recently an employee, who had enough money for a traditional 20% down payment,  had mortgage broker tell them that they would need to use and FHA loan vice a conventional 20% down loan in order to get the funds. Their concern is that with an FHA loan the PMI (upfront and annual) makes this offer from the company less attractive. This program has existed for a few months and this is the first time a broker has brought this up.

 I think that is a lender-specific overlay. FHA loans are higher profit, so some places make their LOs shove everyone using any form of down payment assistance into FHA, the idea being that generally these folks aren't sufficiently sophisticated that the consumers will understand the difference. I really don't like that and wouldn't work at a place that does that, but that's just me.

Here are the stock Fannie Mae guidelines on down payment assistance from an employer. There are jumbo lenders that follow this nearly verbatim, as well. 

@Chris Mason Thanks a lot for the quick and accurate answer.

 That really helps both the borrower and gives interesting perspective on the Loan Originator. They are a local-ish company who I would not peg to operate like that.

If you were in their shoes how would you handle this? Reference Fannie's guidelines and see what they do or go some where else? Something else?

Originally posted by @Bill F.:

@Chris Mason Thanks a lot for the quick and accurate answer.

 That really helps both the borrower and gives interesting perspective on the Loan Originator. They are a local-ish company who I would not peg to operate like that.

If you were in their shoes how would you handle this? Reference Fannie's guidelines and see what they do or go some where else? Something else?

 If your friend shows the guideline, it'll probably be clear to the lender that he either rolls with it or loses the business, so you'd better go to management and get an exception. 

I'm sure that company has other employees that have used the employer down payment assistance, which means it shouldn't be hard for your buddy to find someone that'll go with it.

Point of clarity: 

They are a local-ish company who I would not peg to operate like that.

It's not necessarily shady or anything, I might have been a little blunt above. Probably ~85% of folks using down payment assistance, FHA is indeed a good match. Minimal FICO adjustments + most down payment assistance is high LTV = FHA will be typically where you go. "I have minimal savings of my own" and "I have bruised credit" are strongly correlated, since people with good savings will dip into that rather than miss payments (as a landlord, you know all about that!). And on top of that almost all down payment assistance programs (not including employer-based) have income limits, and anyone that can save up 20% down is probably over that income limit.

So if you're running a large assembly line operation and just want a one-size-fits all, rather than having the flexibility for one-off borrower-specific solutions, FHA will be a natural go-to. That they are higher profit can be seen as icing on the cake.

Can the borrower try another broker to see if he or she can qualify for a conventional loan elsewhere? Or if they accept the loan and plan to refinance it a few months after closing?

@Chris Mason That makes a lot of sense. Thanks a lot for pulling back the curtain and explaining the why behind the overlays. The loan world feels like a black box to me sometimes and its nice to learn about the daily operations.

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