First Time Buying and How Parents Can Help
My 25-year-old niece reached out to me this month exploring the idea of buying her first home. She’s bright and financially sophisticated, yet it quickly dawned on me how daunting that first buying decision can be. At the same time, her parents and many of my peers are looking to support their young adult children in this insanely pricey real estate market and are wondering how. Let’s take a look at how to help them both.
7 Ways Parents Can Help Kids Buy Homes
We have permission to share the following tips and information from JVM Lending's article.
1. Gift of Funds (most popular option)
"If kids have sufficient income to qualify themselves and only need cash, a willing parent should simply “gift” the necessary funds for the down payment and closing costs.
Parents should not, however, just plunk money in their kids’ bank accounts, but should instead wait until their kids are in contract and then “gift” the funds directly to escrow. This makes life much easier for everyone from a paperwork/paper-trailing perspective."
"If parents do not want to simply give their kids money, they can still loan their kids money. Kids, however, cannot qualify for first mortgages in most cases, if their entire down payment is a loan. We have seen some parents turn their “gifts” back into loans after the close of escrow to enable their kids to qualify, although this is not something we can officially condone.
Some parents also simply become a first mortgage lender, fronting enough cash for their kids to make cash offers and then recording a mortgage or deed of trust after close. Whether loaning a portion of the down payment as a 2nd mortgage or loaning the entire 1st mortgage, we always recommend formally recording a mortgage or deed of trust to protect all parties, for tax benefits and to help the kids establish credit."
"Parents can co-sign for kids who lack sufficient income to qualify on their own. Parents, however, should keep in mind that if they already have a lot of mortgage and consumer debt obligations themselves, co-signing may not be a viable option. In addition, parents need to remember that they will be responsible for their kids’ mortgages should the kids ever miss payments, and it will impact their credit as well."
4. Second Home
"If the kids have credit issues and can’t qualify for a loan in any way, parents can also sometimes buy a property for their kids as a “second home.” Second home financing is much better than investment property financing, but the property needs to be more than 50 miles from the parents’ primary residence and it needs to make sense as a second home. Having a place to visit kids or grandkids on a weekend makes “sense” as does visiting a common vacation area."
5. Kiddie Condo
"This is an FHA rule that allows parents to effectively buy a condo, townhouse or single-family residence for their kids with 3.5% down, owner-occupied, or FHA financing – irrespective of the kid’s qualifications. This is a great option for parents who want to buy a place for their kids attending college. It helps the parents and the kids get into the real estate market with very little cash, it helps the kids establish credit, and it allows the parents or kids to have a nice rental property, with owner-occupied financing, after the kids move out."
6. Investment Property
"If none of the above options are viable or appealing, parents can always buy properties as an investment. The drawbacks, however, include higher down payment requirements of 20% to 25% and interest rates that range from 3/4% to over 1% higher than the rates associated with owner-occupied financing."
7. Equity Share
"This is another option parents may want to consider if they want to share in a property’s appreciation, and I set it out in this blog about the Unison Program (kids can also go directly to Unison themselves of course too). But, in exchange for providing 10% down, Unison wants 35% of a home’s appreciation when the property sells. Parents can simply make a similar demand."
All the best,
Jay Voorhees. "7 Ways Parents Can Help Kids Buy Homes". JVM Lending Blog, 12 Nov. 2020, https://www.jvmlending.com/blog/7-ways-parents-can-help-kids-buy-homes/?utm_source=pardot&utm_medium=email&utm_campaign=cold-agent&utm_content=7-ways-parents-can-help-kids. Accessed 10 Jan. 2021.