Information and advice for first time home buyer on consolidatio

UpdatedNov 19, 2007

Can a first-time home buyer consolidate existing debt in the mortgage as one payment if the home has the equity?

If you already own a home and have a significant amount of equity, you may be able to take out a second mortgage or a refinance loan in order to consolidate your other debts, such as credit cards, unsecured personal loans, or even auto loans.

Some special loan programs for first-time homeowners, such as those administered by the U.S. Department of Housing and Urban Development (HUD), contain restrictions that could prevent you from refinancing your mortgage, at least for a certain period of time. Before you attempt to refinance your mortgage in order to consolidate your debts, you should consult with your current lender to determine if you will incur any penalties by refinancing your current loan. For more information about loan programs for first-time buyers, you should read the HUD Q&A Common Questions from First-time Home buyers.

If you do not already own a home, and are looking to consolidate your debts into a mortgage at the time of purchase, I should tell you that this concept, while possible, can be difficult and, in some cases, ethically and legally questionable. Obtaining additional funding at the time of purchase to pay off other debts, or for any other reason, is frequently called "cash at closing."

There are two basic methods designed to provide buyers with cash at closing on new home loans.

Give me your equity

The first envisions a seller who is desperate to sell his home, say a person in the beginning stages of the foreclosure process. In this scenario, the seller would offer the buyer a portion of his equity in order to encourage the quick sale of the home.

For example, if a seller has $50,000 in equity in a home (the difference between the sale price and what they owed on the home), your purchase loan would be for the full asking price of the home, then the buyer would turn around and give you a portion of their equity.

The problem with this option is finding a seller willing to sacrifice a portion of his hard-earned equity. Most sellers will scoff at the suggestion that they pay over part of their equity to the person buying their home.

Over-appraise my property

The second method is considered dishonest by the mortgage industry, but it is used by some brokers to entice buyers into home loans. Basically, a broker and an appraiser collude to over-appraise the value of the home.

For example, if the seller is offering the home for $450,000, the appraiser could appraise the home for $500,000, thus increasing the amount of the loan. At closing, the broker will pay the seller the $450,000 asking price, and give you the $50,000 difference as "cash out at closing."

The problem with this method is that it is fraudulent. You, the broker, and the appraiser are colluding to defraud the lender, which could be illegal, not to mention unethical.

I encourage you to steer clear of any broker offering this type of financing. Another potential problem is that you will owe more on the home than the home is worth, which could be a serious problem if you run into trouble with the loan, as you would likely not be able to sell the home for what you owe on it. Even if you are interested in this type of loan, you will probably have a much harder time finding a broker who will assist you than you would have a few months ago; this particular type of loan was a common scheme used by less-than-scrupulous sub-prime lenders, but with the tightening of the sub-prime market, lenders are much less likely to fund this type of loan.

To shop for home loans, I encourage you to visit the Bills.com Home Purchase page. You can submit your contact information to the Bills.com Savings Center at the top of the page, and we will have several pre-screened mortgage brokers contact you to discuss the options available to you. I wish you the best of luck with your home search.

Sincerely,

Bill

www.Bills.com

6 Comments

BBill, Feb, 2010

I love the creative thinking behind this question. One way is to sell the house at its market value, and then gift whatever the parent wishes to the child over several years. In general, a person can gift another person $13,000 per year. However, through gift-splitting, a married couple can give another couple $52,000 per year tax-free. Also, if the gifting occurs over a series of years, the amount can be substantially more. See the IRS document Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return for more details.

FFirst Time Buyer, Feb, 2010

What if it was a family purchase...For instance what if a parent were to sell the house to a son/daughter for a price under assessed value, but in addition to that, the parent uses the equity left over to give as a gift to the son/daughter for 20% down payment, home updates and bill consolidation. Is that possible or unethical?

BBill, Sep, 2009

Unfortunately, I don't know the value of the property or the amount of down-payment you are willing to put up for this transaction. If the property in question is worth about $80K or more legitimately, you are willing to put down 20%, then I think what you are proposing would be acceptable to a lender. I can't say more than that because there are too many undefined variables in your equation.

JJESSICA LESTER, Sep, 2009

My question is my husband and I are getting ready to buy a house and we want to pay off my bills in the process can we tie up everything in the mortgage and just have the one payment. The house is 32,000 and we need to make some repairs so we are adding 10,000 to this and making the repairs.Our loand price will be 42,000 and were approved for 120,000 could we add in our bills which are about 15,000 why couldnt we do that.

BBill, Aug, 2009

You ask a philosophical question, so I'll respond with a philosophical answer. If a buyer and seller tell the buyer's mortgage lender, the escrow company, and the county recorder one price, and have a secret agreement for different price, and no one is the wiser, has a fraud been committed? As a practical matter, I do not understand why someone would agree to sell a property for 60% of its appraised value. Either the appraiser is incompetent or corrupt, or the appraisal is inaccurate due to a fast-moving market. Or, look at it this way: If the seller believes the property is worth $40K, why on earth are you spending $75K for it?

KKristy, Aug, 2009

If a house someone is purchasing is appraised for 75,000.00 legitimately, but the seller is selling the home for 40,000 (depressed area - multiple homes listed). Why would it be unethical or illegal to take the loan out for the appraised value in order to pay off previous debt. Is that not similar to using the equity in the home to consolidate debt? What about asking for an additional amount in order to upgrade or make repairs to the home in this same scenario?