Parental loans, gifts can ease homebuyers' way

STARTING OUT

June 12, 1994|By Dian Hymer

How can my parents help me buy a home?

One way parents can help is by giving their children money for a down payment. The lender will require a gift letter that states that the money is a gift and doesn't have to be repaid.

The entire down payment usually can't be a gift unless it amounts to 20 percent or more of the purchase price. If the gift is for less than 20 percent, many lenders require that at least 5 percent of the purchase price be the borrowers' own money. Lenders also require that the borrowers have had that money in their own bank account for several months.

Even a gift for 5 percent to 15 percent of the purchase price will help make a home purchase more affordable because the more cash you put down, the less property mortgage insurance (PMI) you'll have to pay. (PMI protects the lender from a buyer default and is usually required when the loan amount exceeds 80 percent of the purchase price.)

Another way parents can help is by lending you money. This could result in a sizable savings if it enables you to avoid PMI. However, beaware that the lender will include the monthly payment on your parents' loan when qualifying you for a mortgage. The lender will also require that the loan have a due date of 5 or more years. Many lenders won't allow secondary financing (that is a loan from your parents that's secured against the property) if you only have 5 percent of your own money to put down. For loan amounts of $203,150 and under, you may not be able to avoid PMI unless the combination of your cash down and the loan from your parents enables you to reduce the amount of the new first loan to 75 percent of the purchase price.

Equity-sharing is an arrangement where parents can purchase property with their children and both parties can realize tax benefits. Usually the parents provide the down payment, or most of it, and the children occupy the property and make the mortgage payments. In order to quality for tax deductions, the IRS requires a written equity share contract (see IRS code 280A) and both parents and children must take title to the property.

By taking title to the property, the parents are responsible for repayment of the mortgage debt and property taxes if their children are unable or unwilling to do so. It may be difficult to find a lender for an equity share purchase. Portfolio lenders (who make loans to keep in their own investment portfolios) are your best bet.

Another way parents help their children is to co-sign a loan. A co-signer, like an equity share partner, takes title to the property and is jointly responsible with the children for repaying the debt.

FIRST-TIME TIP: If your parents are planning to help you buy a house, talk to a lender before you make an offer and get pre-approved for the loan you'll need. If you aren't pre-approved at the time you make an offer, get a letter from your parents stating their intent to help you with the purchase. Include a copy of this letter with your offer. If your parents are going to actually take title to the property, have them sign the offer. Sellers will be more receptive to an offer if they're convinced the parents are firmly committed.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Avenue, No. 25, Oakland, Calif., 94618.

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