PARAMOUNT MORTGAGE - LENDER'S BLOG

Low mortgage rates and lots of housing deals make this a good time for parents to lend their children a hand to buy a home.

Last year, 36% of first-time buyers got help with their down payment from family (typically parents) or friends, according to the National Association of Realtors. That's up from 28% for the previous year.

Depending upon the parent's financial situation, there are basically three options to help a child with a down payment or to purchase a home. The first is a monetary gift, the second is extending them a loan and third option is to co-sign the mortgage. Parents should be aware of the following points to help them make the right decision.

Make a Gift – Right now each parent can give $13,000 tax-free per year to their child and another $13,000 each to the child's spouse. The money will count towards a life-time $1 million gift-tax exemption.

Make a Gift – If your child is shy of a 20% down payment, and your gift money closes that gap it will eliminate private mortgage insurance and reduce their monthly payment.

Making a gift requires planning in advance. Lenders will want proof that the gift money was in the child's bank account at least 90 days before he or she applies for the loan. Parents will need to write a letter stating they don't expect to be paid back. 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. Lenders want to be assured that parents aren't borrowing down payment funds on the child's behalf.

Draft a Loan – Only loan down payment funds to your child when they can pay you back and still qualify for the mortgage. 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.

Lenders will want to make sure that all of the child's monthly debt payments including mortgage, the loan to you, car loan and credit cards are less than 40% of his or her pretax income.

Parents should remember that any interest they receive upon repayment is subject to taxation. They 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. The IRS website at www.irs.gov posts the “Applicable Federal Rates” you'll want to use on your loan.

Cosign the Mortgage – Cosigning 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.

Any way you help your children, be prepared to discuss your financial support openly, especially when there are other kids in the family. They'll want to know why you are making the decisions and how it will affect them if they ever need help to buy a home.