When responsible first-time homebuyers need help buying a home, the parents’ bank can sometimes lend a hand.
Younger homebuyers face a mountain of obstacles, including rising home prices and interest rates, too few homes for sale and unpaid college debt. Student debt is a major source of trouble.
Some families may pitch in to help pay off the down payment. Among homebuyers who make down payment, younger buyers use a gift or a loan from family or friends.
Family assistance like this works best when the kids qualify for a mortgage on their own and parents make the purchase more affordable with, for example, a bigger down payment or a lower interest rate.
First the ground rules
To create a businesslike distance for these transactions,
- Consider disclosing the assistance to all immediate family
- Consider treating all siblings equally
- Use contracts
- Document gifts
Formal agreements offer important benefits. They define obligations and minimize misunderstandings. And if parent lenders die or become incapacitated, all their heirs can view the transaction and its history.
Ways to help
Here are three ways parents can help make it more affordable for new home buyers to purchase a home:
1. Give money
A gift of money is often best. Parents can write a check for any amount they choose. That’s it — no contract or ongoing commitments. Or they can pay all or part of an expense such as mortgage closing costs. Providing down-payment assistance can help new borrowers avoid paying for private mortgage insurance, which helps keep their monthly payment low.
HOW IT WORKS
Strict rules dictate how cash gifts are used in a home purchase, and they vary by mortgage type, lender and lender offer.
Lenders like to see money gifts — easily traceable checks, bank transfers or wire transfers — in a borrower’s bank account three or four months before applying for a mortgage. Givers and recipients may need to sign letters confirming that the money isn’t a loan.
When it comes to taxes, anyone can give any other person a gift without filing the gift-tax return. A tax professional can confirm how the rules apply to individuals’ specific circumstances.
2. Finance the mortgage
Parents with cash to invest can become the mortgage lender, offering extra-easy terms, like no closing costs or no down payment. They can charge a higher rate of interest on their money than it earns in a savings or money market account and still offer kids a lower-than-market mortgage rate.
This could be a win-win for both.
HOW IT WORKS
Parents can fully fund their children’s first home
3. Co-borrow
Although riskier for parents, co-borrowing is another option. Mortgages with co-borrowers are nearly a quarter of all new-purchase mortgages.
Co-borrowing helps borrowers overcome a limited credit history or a too-high debt-to-income ratio.
HOW IT WORKS
Parents apply for the mortgage, too. They must meet the lender’s credit requirements and sign loan papers with their kids at closing.
Aside from the mortgage itself, a separate family contract can define expectations and details such as who gets how much equity when the home sells and what happens in case problems arise, says Sirkin, the real estate attorney.
For parents interested in being co-borrowers, there are some things to keep in mind:
- Not all loans allow co-borrowers, so it’s good to confirm the option when shopping for mortgages
- Some lenders may call this step co-signing, which may have different parameters, but the outcome is the same: Parents and children are equally responsible for the loan and any missed mortgage payments
- Parents’ credit could be affected, making it hard to finance another big purchase later, even if children make payments on time
With all the headwinds facing first-time homebuyers, family help sometimes makes all the difference.
