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, 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.
2) Loan Down Payment or All Funds.
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.
3) Co-Sign.
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) 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 15% to 25% and interest rates that range from 3/4% to over 1% higher than the rates associated with owner-occupied financing.
6) 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.
7) Gift of Equity.
If the parents already own the home that the kids want to buy, the parents can simply “gift 20% of the equity” and lenders will consider that gift of equity to be an adequate down payment. I explain this in more detail in this blog.
8) Buy on Behalf of Child With Disabilities.
Parents can buy with “owner-occupied” financing if they can prove their child has a disability.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
