Mortgage rates are low, and after two years of price declines the housing market is full of bargains, especially for the modest properties that appeal to first-time buyers. And those buyers can get an $8,000 tax credit this year, too.
Still many first-time buyers have trouble scraping together the down payment. And many just don’t have the credit history or income to qualify for a mortgage, even though they’d be perfectly capable of making the payments if they got one.
Seems like a perfect time for help from mom and dad, or grandpa and grandma.
Help with Down Payments
If the down payment is the problem, a gift is the simplest solution. Under federal tax law, one individual can give another up to $13,000 a year without triggering tax for either party. That means four relatives could give a young home buyer or couple $52,000 a year, enough for a 20% down payment on a $260,000 home.
If the gift is used for a down payment, it must really be a gift and not a loan. The mortgage company may require a signed statement saying so.
Help with Loan Qualifying
When qualifying for a loan is the problem, the parents or other benefactors can co-sign the mortgage, to serve as a back-up if the buyers can’t make their payments.
Keep in mind that the parents are on the hook for the whole amount, even if they co-signed just to help the new homeowners qualify. The parents’ credit score would be severely damaged if monthly payments are missed. The lender and credit-rating agencies won’t care that it was the kids who fell behind, not the parents.
Set Up an Agreement First
Before entering a financial partnership, parents and children should hash out a detailed agreement. How much will each party contribute toward the monthly payment? What will happen if one party or the other falls short?
How will ongoing expenses like maintenance, taxes and insurance be divided? If the property is sold, what share of the profits will each party get? Should the property sell at a loss, how much will each have to come up with to pay off the loan? How will a disagreement over a sale be resolved?
Who will make decisions about maintenance and improvements? What will happen if anyone divorces or dies? What if the young couple wants to move for a new job, or has to?
Should there be a requirement that the young borrower refinance and buy the parents out as soon as his or her income grows large enough?
Once resolved, all these matters should be spelled out in a contract prepared by a lawyer and signed by everyone involved.
And before the deal is done, everyone should think about whether it is worth all the potential stress and friction. When parents help out one child, for example, other children may feel their inheritance is being put at risk. Or they may feel they should get a share of any gains.
That issue could be especially messy if the parent’s pass away while the arrangement is still in place. Their wills should provide for this, and it might pay for all parties to take out life insurance policies to cover their obligations.
Given the many variables involved in a home-owning partnership, it probably makes sense to go with a plain vanilla 30-year fixed rate mortgage, so everyone will know what the payments will be. These loans average about 5.5 %, according to the BankingMyWay.com survey, and the search tool shows that many lenders do better.
Wells Fargo (Stock Quote: WFC), for example, has a 30-year fixed loan at 5.375%, and J.P. Morgan Chase (Stock Quote: JPM) charges 5.125%. Use the Mortgage Loan Calculator to figure payments at those rates.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.