Cash, income and credit are the three major obstacles to obtaining a mortgage and reaching the American dream of becoming a home owner. If you want to see your children stop throwing away money renting (or maybe it’s time they move out), help overcoming these obstacles may lie within you.
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 their first home and capture the American Dream.
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 offer smaller down payments 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 down payment and/or closing costs to be provided through a gift from an immediate relative such as one’s parents. Regarding the provision of gifts, the most liberal programs 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 3.500% 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.
- Under the FHA program, immediate family members can help a relative purchase without living in the home themselves (non-owner occupant co-borrowers).
- FHA even has a special bridal registry program and allows unsecured loans from immediate family members.
- VA (Department of Veteran’s Affairs).
- VA loans are for the benefit of active military and veterans of military service. The majority of VA loans require no down payment 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 the use of gifts. In most cases, unless the gift constitutes 20% of the total purchase price of the home, conventional programs require at least three to five percent of the money to come from the purchaser. However, some recent homebuyer programs for low-to-moderate income buyers have been introduced which have liberalized requirements regarding gifts.
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.
- Under the FHA program, immediate family members can help a relative purchase without living in the home themselves (non-owner occupant co-borrowers).
- Mortgage programs vary with regard to the allowance of co-borrowers and FHA contains the most liberal requirements.
- 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.
Credit support. One way a parent may help is for those children who have no credit or a substandard credit history. Although adding a co-borrower with a clean credit history does not erase the existence of a poor credit history; 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 par.
When considering purchasing, it makes sense not to ignore traditional sources of aid such as our families. With rates a bit higher and home prices back up — help may be needed! After all, what goes around, comes around!
