We’re in the “home buying season,” and Orion’s brokers have noticed an increase in houses for sale in various neighborhoods. There are many ways to buy a home, and if you’re helping a young family, having help from parents is something that is very common and something Orion can help with. Property values in many areas warrant some kind of help, and why not keep it in the family? There are several ways parents can help their children purchase a home. Each has different consequences, short and/or long term. Good brokers remind clients that parents need to think about the impact on their lives today, and in retirement, or if they are retired, their future.

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One way some parents help is by purchasing the house themselves. They provide the down payment, they qualify for the mortgage, and they are the only ones on the title and mortgage. Their child moves in, and the agreement is that at some point the parents will give the house to their son or daughter, or give a percentage every year.

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Typically, under this type of arrangement the child will make all, or some, of the payments for mortgage, taxes, and insurance, either directly to lender, tax collector and insurance company. However, brokers tell our AEs that they have seen this situation where they do make the payments but pay their parents directly. If the latter, the parents can then claim the payments as rent and then, if eligible, write off certain expenses. In this set-up, the parents essentially purchased an income property and rented it to their child.

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If the agreement is that the child will make the payments for the mortgage, taxes, and insurance it is advisable for the parents to add the children to the title of the property. If it can be shown they have made those payments then they should be able to deduct the mortgage interest and property taxes (checking with tax professional first). In this scenario, the parents purchase the home but essentially turn the home over to their child. In the future, by showing they have been making the payments and living in the property it will be easier for the kids to refinance in the future, should it be beneficial, and remove the parents from a mortgage obligation and obtain full title.

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A major reason against this option is since there are no owner-occupants on the mortgage, the loan will be non-owner occupied with a higher interest rate.

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A more desirable way for brokers to assist their clients is to recommend the parents and children co-sign for them on their mortgage application. Orion has loan programs that will allow family members to co-sign for mortgages and not occupy the property, what we call “non-occupant co-borrowers.” In this scenario, the child cannot qualify for the mortgage, usually because their debt-to-income ratio is too high. Depending on the parent’s total income and debt obligations, including their own housing payment, they may be able to co-sign for their child and enable loan qualifying. The parents would be on the mortgage and on title to the property.

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The parents are still liable for the loan payment, but the child is also responsible and has a lot more control over the situation than they do in the first scenario. Some parents are concerned, rightfully, how their being on the loan may impact their ability to get a loan in the future; most loan programs have a guideline for such a situation, known as “contingent liability.” If the parents can show the child has made the last twelve payments in a timely fashion, then most mortgage programs will not count the payment for parents qualifying for another loan in the future.

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In the future if it makes sense for the child to refinance then it is easier in this scenario than the first scenario as they are on title and on the loan, so the process is easier. As well, depending on their income situation, the child maybe able to refinance without having the parents on the new loan, there by releasing liability for the parents.

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Many parents help their children purchase their homes by giving them the funds needed for down payment and/or closing costs. Many families have the income to qualify fora mortgage but are short in the amount of cash they need. Enter Mom and Dad who can provide a gift for the funds required. The process is simple, and three items are needed: proof of funds to gift, proof funds have transferred to the child, a gift letter signed by donor and recipient.

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There are loan programs Orion offers that allow for gift funds for all of the down payment and closing costs, some programs as low as 3.5% down, others five or ten percent. If the resources are available this is the easiest scenario to enable parental assistance, and the one that has no long-term consequences other than not having those funds available for the parents’ own use in the future. Ask an Orion AE for tips and programs!

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