For parents who have the financial means, helping children with a down payment is win-win
Echo Boomers are the next generation to have a large impact on real estate. The echo boomers is the largest US generation since the Baby Boomers. The US Echo Boomer generation (aka the Millennials or Generation Y) with birth dates from 1982 to 1995 exceeds 87 million. The number of Baby Boomers (birth dates from 1946 to 1964) was 76 million and was the largest US generation ever. The Echo Boomers are a group plagued, like the Baby Boomers, with a lack of job opportunities and a society that is changing rapidly. They have observed the bubble burst and are very cautious about purchasing a home.
Many parents today are glad to be helping their children buy a home by offering them emotional and monetary support – and sometimes the basement of their own homes. This has led to an increase in the percentage of parents helping children buy a home according to the National Association of Realtors. Parents basically have three options:
- a monetary gift
- extending a loan
- co-signing the mortgage
Gift: Starting in 2013, the annual exclusion for gifts goes up to $14,000, from $13,000. Spouses can combine their annual exclusions to double the size of the gift. For example, this year a married couple with a child who is married and has two children could make a joint cash gift of $26,000 to the adult child, the child’s spouse and each grandchild – four people – providing the family with $104,000 a year. Gifts that exceed the limit count against the lifetime exclusion, which this year is $5.12 million ($10.24 million for married couples.
Making a gift requires planning in advance. Always check with the lender well before making an offer on a home. Follow the lender’s requirements very carefully. Not all investors/lenders have the same requirements. An overview of their requirements: proof that the gift money was in the child’s bank account at least 90 days before he or she applies for the loan; a letter from the parents stating the money is not a loan; if the parents are holding gift funds in their account, they’ll need to prove that they had the funds for at least 60 days (assurance that the money is not borrowed funds).
Loan from parents to children: Rules prohibit family loans on the 3.5% down payment needed for government-insured FHA mortgages. For conventional mortgages, lenders typically allow parents to fund only half to three-quarters of a 20% down payment. The lender/investor will require that the loan to debt ratio for the child (monthly debt payments including mortgage, your loan, car loan and credit cards)are within their parameters which are usually 40%. Parents must follow IRS rules and charge at least the IRS’s minimum rate (0.35% to 3.35%) which can change monthly depending on the length of the loan. Check the IRS website at www.irs.gov posts the “Applicable Federal Rates” you’ll want to use on your loan. The interest payments on the loan are subject to taxation.
National Family Mortgage specializes in intra-family mortgages. They have a one-time fee for providing the financial documents. This fee and their services are explained in their online brochure. The National Family Mortgage website is filled with a lot of valuable information. If you are thinking of asking the Mom-and-Dad Bank for a loan, a sound strategy should be sharing a copy of their brochure at your meeting.
Co-sign the Mortgage: Co-signing is risky. Your signature on a loan document with your child obligates you to the mortgage as well as your child. The added debt can also affect your credit scores. There may be good reasons to cosign, especially if your child is in grad school and will have a good job lined up when he or she graduates. Or, the child may have a solid job, but sporadic income that would disqualify him or her from getting the loan.
Whichever way you decide to help your children, make sure all parties are aware of the details so that there are no misunderstandings and no hurt feelings with siblings.
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