With today’s rising home prices and interest rates—not to mention outstanding student loans—young adults who have decided to purchase a house might want to consider asking their families for a cash gift or loan to help make the process more affordable. Below are some ways parents can help their children achieve their dream of homeownership. And, as always, please be sure to consult with your PERL Mortgage Loan Officer if you have any questions at all.
A monetary handout is ideal. Parents can bestow their children with a check for any amount they desire, or they can choose to pay all or a portion of expenses such as mortgage closing costs and down payments. Offering assistance for the down payment can even help first-time borrowers avoid paying for private mortgage insurance, which will help lower monthly payments. Note: Strict rules govern how cash gifts can be used in a home purchase, and these rules vary by mortgage type and lender. Typically, lenders like to see easily traceable checks, or bank and wire transfers show up in a borrower’s bank account at least three to four months before they apply for a mortgage. Donors and recipients also might need to sign a letter that states that the cash is a gift rather than a loan. As for the tax ramifications: Parents currently can gift their children an amount up to $15,000 in cash or stocks without having to file a gift-tax return IRS Form 709.
Although this method might be more precarious for parents, co-borrowing can go a long way toward helping children who have a limited credit history and substantial debt. In this scenario, the parents apply for the mortgage along with their children. This means the parents must meet the lender’s credit requirements and sign loan papers with their offspring at the time of closing. A separate family contract is recommended when it comes to defining expectations and details as to how equity is divvied up when the home sells and how to solve any problems that might surface. Some other things to keep in mind: This option sometimes is referred to as co-signing, which might involve different parameters, but the parents and children still are equally responsible for the loan and any missed mortgage payments; and, even if children make timely payments, a parent’s credit still could be affected, which might make it more difficult to finance another large purchase down the road.
Don’t hesitate to contact your PERL Mortgage Loan Officer if you have any questions or would like to receive more information on home purchase or refinancing options!