Everyone can use a little help from Mom and Dad from time to time, particularly when it comes to purchasing a home. Many parents like the idea of assisting their children with their first home purchase. Today I want to talk about how parents may and may not assist their children with buying a home.
Currently home purchases by first time home buyers 35 years old and younger is down 22%. The biggest chunk of the home buying market is normally made up of first time home buyers. But lately the first timers have been staying in Mom's basement or renting. Some of that has to do with the job market and student loan liability. However, the economy is picking up, and many Millennial are beginning to find work. Rents are rapidly rising so it is only a matter of time before these folks begin to dip their toes into the home buying waters.
One question I get frequently has to do with whether or not parents can co-sign the mortgage in a situation where the son or daughter doesn't have credit scores that qualify him or her to purchase the home. Unfortunately the answer to that is no. Credit is evaluated using the lowest middle score of how ever many borrowers are on the mortgage. So good credit on the part of the parent doesn't offset bad or no credit on the part of their offspring.
But there is some good news in that if the issue is one of debt to income, a non occupying co-borrower can be added to lower debt ratios and bolster income if the 5% down payment is coming from the occupying borrower. So if the child has their own 5% to put down, but has a high debt ratio due to an entry level income, Mom and Dad can add their buying power to assist.
If the buyer is qualified for an FHA loan parents can help in two possible ways. FHA allows parents to be non occupying co-borrowers AND gift the money for the down payment.
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It is important to note, however, that anyone who is on the mortgage has payment responsibility towards the property. So if junior is delinquent in his mortgage payment, Mom and Dad's credit will be affected. And in the case of junior blowing off the payment all together, Mom and Dad are responsible for making that payment. As parents you also can't purchase the home for your child as a primary residence. This is viewed as an investment property -even though it is your child occupying and in many cases making the actual payment. Just one of those rules set down by Fannie Mae, Freddie Mac and Government loans.
Currently we are affiliated with two lenders that allow a 5% gift from parents for conventional lending. This is a help for borrowers with excellent credit scores as conventional lending is typically less costly than FHA due to the mortgage insurance requirements.
On any type of loan parents are allowed to gift funds for closing costs, inspections, etc. However, those funds will have to be sourced. In some cases depending on when the funds were put into the child's bank account, the parents may have to produce their own bank statement showing the transfer of funds.
Hooray for parents! Assisting your child in the purchase of a home is a large step on the way to a stable financial future. Keep it up Mom and Dad!
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