by Dian Hymer
First-time buyers often have enough income to qualify for a mortgage but lack the cash they need for a down payment and closing costs. A gift from parents is one way to make up this short-fall.
When parents give their children money to buy a home, the lender will require a gift letter from the parent which states that the money is a gift that won't have to be repaid. Also, your parents may have to give your lender some proof of where their gift funds came from (savings, equity loan, stock liquidation, etc.).
Another way parents can help is by loaning you money. This could result in a sizable savings if it enables you to avoid Mortgage Insurance (MI). MI is insurance paid for by the borrower to protect the lender in case the buyer defaults. MI is often required when the loan amount exceeds 80 percent of the purchase price.
The lender will usually require that the loan from your parents have a due date of 5 or more years. Also, many lenders won't allow secondary financing (that is, a loan from your parents that is secured against the property) if you only have 5 percent of your own money to put down.
There is another recent restriction to be aware of. For loan amounts of $207,000 and under (called conforming loans), you may not be able to avoid MI if you have a 10 percent down combined with a 10 percent loan (called 80-10-10 financing). The lender may charge MI unless you can reduce the amount of the new first loan to 75 percent of the purchase price.
Equity-sharing allows parents to purchase property with their children and both parties can realize tax benefits. Usually the parents provide the down payment, and the children occupy the property and make the mortgage payments.
In order to qualify for tax deductions, the IRS requires a written equity share contract (see IRS code 280A) and both parents and children must take title to the property. By taking title to the property, the parents are responsible for repayment of the mortgage debt and property taxes if their children are unable, or unwilling, to do so. It may be difficult to find a lender for an equity share purchase. Portfolio lenders are your best bet.
Another way parents can help their children is to co-sign a loan. A co-signer, like an equity share partner, takes title to the property and is jointly responsible with the children for repaying the debt. A lender will require two years' tax returns from the parent co-signer, and a three month history of bank accounts. Social Security and dividend income can be used for loan qualification purposes. So, a retired parent may be an eligible co-signer.
First Time Tip: If your parents are planning to help you buy a home, talk to a lender before you make an offer and get preapproved for the loan you will need. Buyers who are not preapproved at the time they make an offer should get a letter from their parents which states the parents intend to help with the purchase.
Parents who are going to actually take title to the property should sign the purchase agreement. Sellers will be more receptive to an offer if they are convinced the parents are firmly committed to helping their children.
The Closing: There may be strings attached to parental assistance that go far beyond the financial ties. Carefully consider how this will affect your relationship before you enter into a purchase contract.
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