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Industry Commentary

Many Ways Parents can Help in Property Purchase

Gifting, co-purchasing & co-borrowing provide options


September 5, 2003

Owning a home is a dream that is shared by millions and millions of Americans. In 2003, the national home ownership rate reached a record high as almost 70% of all families owned their own home. A significant number of families were able to reach their goal of home ownership in the past few years because of record low interest rates. The development of mortgage programs specifically targeting first time buyers has also helped the cause. These programs are designed to help with three areas renters traditionally have trouble when attempting to purchase -- cash, credit and income.

When considering purchasing, it makes sense not to ignore traditional sources of aid such as our families. Traditionally, the American parent has been a significant source of help when their offspring decides to become part of the community of homeowners. Here are a few important ways in which parents can help their children purchase real estate.

Alleviating cash shortages through gifts. According to major surveys, the number one obstacle to owning a home is the shortage of cash. Though many mortgage programs now require smaller (or no) downpayments in order to purchase a home, at least some capital must be provided by the prospective homeowners. Most mortgage programs allow some or all of the liquid assets needed for the downpayment and/or closing costs to be provided through a gift from an immediate relative such as one's parents. The most liberal programs with regard to the provision of gifts are FHA (Federal Housing Administration) and VA (Department of Veteran's Affairs). FHA is a very popular program for first time buyers and it allows all of the capital necessary for the purchase (typically 3% of the sales price) to come from a gift. FHA even has a special bridal registry program and allows unsecured loans from immediate family members.

  • VA loans are for the benefit of active military and veterans of military service. The majority of VA loans require no downpayment and therefore the use of gifts would typically be for those who need the help with closing costs (especially when sellers are not contributing towards such costs).
  • Conventional programs tend to be less liberal with regard to the use of gifts. In many cases conventional programs require at least three to five percent of the money to come from the purchaser, unless the gift constitutes 20% of the total purchase price of the home. More recently, low-to-moderate income homebuyer programs have been introduced which have liberalized requirements regarding gifts.

Purchasing together for income support. Purchasing a home with your children may enable those who do not have enough income to qualify for a mortgage to finance their home purchase. Once again, mortgage programs vary with regard to the allowance of co-borrowers and FHA contains the most liberal requirements. Under the FHA program, immediate family members can help a relative purchase without living in the home themselves (nonowner occupant co-borrowers). VA is the most stringent with regard to co-borrowers, as only the spouse or another veteran who will live in the home can cosign. Conventional programs vary with regard to their requirements, but once again these have become more liberal with the growth of low-to-moderate income programs.

Purchasing together for credit support. One way a parent may help is for those children who have no credit or a substandard credit history. It should be noted that adding a co-borrower with a clean credit history in no way erases the existence of a poor credit history. On the other hand, a strong co-borrower may be able to make the difference in cases where the credit history of the children is close, but not quite up to standards.

Cash, income and to a lesser degree, credit. The three major barriers to obtaining a mortgage and reaching the American dream of becoming a home owner. Help for overcoming these obstacles may be no further away than going back to your roots. With rates a bit higher and home prices up -- their help may be needed!

Dave Hershman is a mortgage industry author and speaker -- with eight books and hundreds of articles to his credit. He also heads OriginationPro.com Mortgage School. You can email Dave at [email protected].

click here for more articles by Dave Hershman

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