I originally wrote this blog in November of 2020, when people were starting to get very concerned about housing affordability.
Ironically, though, the median home price was about 15% lower then, and interest rates were almost 4% lower (under 3% on average then, compared to almost 7% now).
My point is that this blog is far more relevant today than it was in 2020.
Parents frequently ask about the best options for helping their kids buy homes, so I thought I’d set out a few in this blog.
1) Gift of Funds
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; they 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.
2) Loans
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 first mortgage lenders, fronting enough cash for their kids to make cash offers and then recording a mortgage or deed of trust after closing. 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.
3) Co-Signing
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 they ever miss payments, and it will also impact their credit.
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 (For Kids In College and Disabled Kids)
Both FHA and Fannie Mae have very flexible provisions that allow parents to co-sign for kids in college (for any type of residence, not just condos) – so the kids can buy homes near the college to live in and rent out to roommates as well for extra income. The kids just need a credit score and minimal other qualifications (income is not necessary, for example). This is similar to standard co-signing but there is more flexibility. These are excellent loan programs that help the parents and the kids get into the real estate market with very little cash (owner-occupied financing requires much smaller down payments), that help the kids establish credit, and that allow the parents and/or kids to acquire what will be a nice rental property (with owner-occupied financing) after the kids move out.
Note, too, that Fannie and Freddie have even more flexible programs that allow parents to buy properties for disabled kids with owner-occupied financing – and the disabled kids need no qualifications at all (not even a credit score).
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 too, of course). 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.
