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How to Help Your Kids Buy a Home

With a short supply of affordable homes throughout Southern California, along with stricter lending standards that can make it difficult for first time home buyers, many turn to mom and dad for help. While it is a blessing to be able to assist with this life-changing purchase, there are many factors to consider.

Common scenarios for helping include:

-Providing the down payment -Buying a house and renting it to your child

-Buying a house and letting your child live there for free

-Co-owning a house with your child, dividing the equity, so when the house is sold you get your money back

-Buying a multi-unit property, or a place big enough for roommates and rent the other units to offset cost

-Finance your child’s home purchase with a structured loan that includes payment terms, monthly statements and tax forms.

Whichever situation suits your needs, remember to put your retirement savings first, before helping your child own a home. Staying within budget also protects the child from overextending their ability to pay their mortgage and parent, depending on the arrangement.

Our lending partner, Diane Uehlinger has highlighted several types of loan considerations.

“I’ve worked with many first-time homebuyers and it’s wonderful when parents are in a position to help. There are typically two ways parents can assist their child with buying their first home: a gift for all or part of the down payment, or being a co-borrower on the loan,” says Diane. She also points out that rules vary depending on the loan, based primarily on if it’s a conforming loan or a jumbo loan.

As Loan amounts between $424K-$636K (LA and Orange County) can fall into either the conforming or jumbo bucket, Diane recommends discussing all options with your lender partner upfront. Given the nature of the market and the above complexities, Diane strongly recommends all potential homebuyers get pre-approved.

Here are some additional guidelines to consider:

1. Gift for Down Payment

If the down payment is at least 20%, 100% of the down payment can be a gift. If the down payment is <20%, then 5% of the down payment needs to come from the child. The parent will need to sign a Gift Letter and may need to provide proof that they have the funds to donate. Since the money is a gift, the parents are not added to the title of the property. For Jumbo loans, the child typically needs to put 5% of their own funds toward the down payment, regardless of the total amount.

2. Parent as a Co-Borrower (called a ‘Non-Occupant’ Co-Borrower)

The parents must sign the loan documents, including the Promissory Note, and the purchase contract, if they are going to be on the title of the property. The child’s debt ratio cannot exceed 45%, and a co-borrower cannot compensate for the child’s really bad credit. Jumbo loans require the child to put 5% of their own funds towards the down payment, and to have some “reserves.” Also, with Jumbo loans, the parents are on the title.

Diane notes that sometimes the child is simply not in a position to qualify under any circumstances. In this case parents often purchase the property themselves as a second home or investment property and may or may not add their child to title (since the child is not on the loan no credit is being established).

Additional factors to consider before jumping into a large purchase include sibling dynamics, how steady and settled your son or daughter is in their current job, as well as their sense of responsibility and understanding of homeownership as a long-term responsibility.

For more information about the specifics of which type of loan you might consider, as well as ways to structure the purchase and to pre-quality, contact Diane Uehlinger at 949.999.7929 or diane.uehlinger@bankofhope.com.

To find a home for you or your extended family, or list your current property, call Carol today 949.395.3994.