We are often asked if buyers can purchase a property with “owner occupied” financing for their parents.
Our answer is “it depends,” but the frequency of the question prompted me to set out four options below.
I. Second Home
“Second home” financing is almost as favorable as owner-occupied financing, so this is a great option as long as the home meets all of the “second home” criteria, e.g. common vacation locale, more than 50 miles from primary residence, etc. Children can’t simply purchase a second property down the street from their primary residence and just call it a “second home” in order to obtain more favorable financing.
II. Co-Signing/Gifting
Another option for children is co-signing a loan for their parents. This, however, puts the children’s credit at risk, as the loan will show up on the children’s credit report, and it could make it more difficult for the kids to qualify for additional financing down the road. Children might also consider just gifting enough down payment funds (if available) to make the mortgage small enough for their parents to qualify.
III. Becoming Parents’ Landlord
This option offers less favorable financing, as “investment property” rates are about 1/2 percent higher in general and down payments typically need to be larger (20% to 25%). But, this option is often simpler from an ownership perspective (particularly after the parents depart) and it can provide more tax advantages, as every expense associated with the property can be deducted for income tax purposes.
IV. Proving Parents Are Unable To Buy
Fannie Mae allows children to purchase on behalf of their parents as long as the children can prove that the parents can’t qualify on their loan. This is an excellent option but it requires two “approvals” of sorts, as the kids have to provide documentation to prove they can qualify like any other borrowers, while the parents have to provide documentation to prove they can’t qualify, e.g. Social Security Award Letters, Paystubs, etc.
Pretending The Home Is “Owner Occupied”
Sometimes children purchase properties as “owner-occupants” and then plunk their parents in the homes thinking there is no risk because it is just their parents and not actual tenants. This is risky because if lenders get wise to the ruse, they will still call the loan due (and yes, lenders do perform “occupancy checks”). In addition, lenders will not usually allow buyers to have more than one “primary residence.” So, a primary residence purchase on behalf of parents could preclude the purchase of an actual primary residence by the kids themselves.
