Hallfinancialcorp.com Home-Buying-Tips
Gen-Y is growing up fast, and many of its number are ready to become first-time home buyers. The problem is that Gen-Y has not been blessed with a good economy during those all-important young adult years. This means that first-time home buyers in this generation often need the help and support of their parents to establish a new mortgage.
If you’re a parent of a Gen-Y young adult, and you’re wondering how you can help your child purchase a home, there are several things you can do.
1. Provide Down Payment Assistance
Young people may have a fantastic education and even a great job, but most simply haven’t been in the workforce long enough to have saved money for the 20% down payment that banks like to see. If you have the money available, down payment assistance is probably the most valuable thing you can do to help your children, since it will spare them the cost of having to purchase PMI. Before you pull out your checkbook, however, there are a few factors to consider.
While FHA loans allow down payments to come from gifts, not all lenders are willing to accept gifts as down payments. Some think the gift makes it too easy to walk away from the new mortgage if all doesn’t go well. Others are afraid that the “gift” is really a loan that the borrower will be obligated to repay. If the latter is the case, you may need to sign an affidavit stating that you do not expect the money to be repaid.
Finally, before you give a gift of money, remember that the IRS limits the amount of money you can give to an individual to $12,000 per year before you have to deal with tax consequences. Depending on how much is required for the down payment, you may need to start your gifting program a year or two in advance of the purchase.
2. Assist with Closing Costs
If you can’t afford a 20% down payment, perhaps you can give your child enough money to pay points in order to lower his or her interest rate. You may also help out with the PMI, private mortgage insurance that your child will be required to purchase if his or her down payment is less than 20%. Other costs common to loan closings include origination fees, home inspections, legal fees, and title assessments.
3. Co-Sign the Loan
If your child’s credit is poor, and your credit is good, you may want to consider agreeing to co-sign the loan. Based on your good credit, your child will get better mortgage rates, more loan choices, and a larger loan amount. Before you sign on the dotted line, though, remember that if your child defaults on the loan, it will become your responsibility. Are you prepared to deal with a damaged credit score, a mortgage payment, and the ill feelings that crop up between family members at such times? If not, co-signing may not be the way to go.
4. Buy the Home and Rent it to Your Child
Assuming your credit rating is better than your child’s, this option opens the door to lower mortgage rates and higher loan amounts. You can pay the mortgage, while your child lives in the home and pays rent to you. In most cases, parents who rent to their children give the child $12,000 of equity in the home every year until he or she fully owns the property. If you decide to provide this kind of assistance, talk to a lawyer who is well-versed in rental and real-estate issues. Have the lawyer draw up a contract specifying your obligations and the obligations of your child. Then, both you and your child should sign it.
5. Give the Gift of Experience
If you don’t have extra money to help your child out, and if your own credit isn’t that great, you can still help your child by sharing your own experiences of home ownership. If your child agrees, go with him or her to look at different properties and point out the strengths and shortcomings of each. Talk about different loans you’ve had in your life, and explain which ones were the easiest to manage. Share any hot negotiation tips you’ve learned.
If you want to help your child obtain a house, there are many ways, financial and otherwise, that you can provide valuable assistance.
About David Hall