Becoming a first time homebuyer is a goal that sometimes requires the help of others; in most cases the source of this assistance is the parents of the borrower. I’ve noticed this happening more often as a result of new mortgage rule announcements and higher home prices. There are a few ways for a parent to support their child on the road to home ownership and below are the highlights of the most common forms of financial aid;
If a parent does not want to have any kind of ownership of the property or ties to the new mortgage their child is about to get, a gifted downpayment may be the route to take. It is what it sounds like, a parent will gift all or a portion of the required downpayment to their child for the purchase of a home. As the funds are considered a gift, they do not have to be repaid and the gift giver(s) and receiver(s) are required to sign a letter reflecting this. In addition to a gift letter, the mortgage lender will also require confirmation the gifted funds have been deposited into the borrowers bank account. Some lenders may also request confirmation of the source of funds from the gift giver, it’s not always required, but it’s good to be prepared if it’s requested.
Assisting your child with debt payoffs is another way to use cash to help them qualify as less debt means qualifying for more.
Buying and selling between family members
When a child wants to buy a property from a parent or another family member, a gift of equity can replace the requirement of a monetary downpayment. For a lender to approve mortgage financing on this type of transaction, it needs to be structured properly. The downpayment documentation requirements are similar to that of the gifted downpayment above. A gift letter is required, however, no cash is trading hands, instead, the home equity is considered as the downpayment. The notable difference with this type of scenario is most of the lenders require a minimum of 20% of the purchase price as the gift of equity. This means the selling family member will receive a maximum of 80% of the homes value at time of sale. A formal purchase agreement will likely be required and the market value will be confirmed with an appraisal report as this is considered to be a “non-arm’s length” transaction.
Qualifying for the mortgage in this situation is routine in that you will be asked to provide income confirmation and a credit report will be ordered. Be forthcoming with the information that the transaction is happening between family members as it’s important your mortgage professional knows in order to secure a mortgage approval with conditions that can be met by the borrower. If a lender finds out the transaction is between family members after they’ve issued a commitment, they could ask for additional documentation or even withdraw their approval decision.
Co-signing for the mortgage
When there is no property to give or extra cash is not available for a gifted downpayment, mortgage co-signing could be the ideal solution. This scenario involves one or both parents going on the mortgage, and most often the land title too in order to assist their child in obtaining an approval. If a lender is requesting a co-signer, they’re likely looking for additional “comfort” to support the application for financing. A strong co-signer is an applicant with great credit as well as a reliable and sustainable income source.
There are some important details for both the main borrower(s) and co-signer(s) to understand before signing the mortgage commitment. One of the most impactful implications is that a co-signer must now declare 100% of the new mortgage payment and all costs associated with that property under their total debts on any application they make for future borrowings.
The amount of time a co-signer is required to stay on the mortgage and the land title will vary with the different financial scenarios of each of the applicants. When the time is right for the main borrower(s) to qualify on their own and the cosigners are to be removed, it will only be a change of ownership. The current rate and amortization does not have to be changed at that time.
These types of financing solutions are not limited to parents only, some lenders allow gifted funds or equity from other family members too. Though they have to be considered ‘immediate family’ by the lender to be eligible. Lenders tend to be pickier about who they allow to co-sign a mortgage, having a detailed conversation with your mortgage professional to find out what options are available is a good start.
Just because you can, doesn’t mean you should. Before entering into financing of any type, it’s important for all parties involved to consider their financial goals and how a potential mortgage payment will affect them going forward.