By Harold Copher, Jr. Willow Bend Mortgage
I’ve seen it reported that anywhere between 10-20 percent of parents with children ages 18-35 anticipate assisting them in the home buying process within the next five years. More often than not the parents are volunteering to help but some are greeted with an “I need to ask a favor; would you mind co-signing this loan for me?” request. If they are able, almost all are willing to help under either circumstance. Whether that willingness to help is motivated by wanting them out of the house or just to help them in their journey, it is left for you to contemplate.
Helping someone out is a great thing, but planning and understanding the risks before you decide how to help is good advice. Let’s take a look at three general ways you might assist with their mortgage loan: (1) helping with their credit, (2) assisting with the down payment or (3) supplementing their ability to qualify for the monthly mortgage payment.
The first option is the simplest and carries little risk for the donor. Imagine your 18-35 year old’s credit report shows they pay their bills on time, but they don’t have that many active accounts, and those accounts that are reporting haven’t been opened for very long. You can actually “share” your good credit history by making them an “authorized user” on one of your revolving payment accounts. It may take a couple of months before it is reported as part of their credit history, but they will likely benefit from your good record of payment. This is acceptable, so long as both parties have an actual relationship – in other words, you aren’t doing this for strangers for a profit or something similarly deceptive. While there’s a chance your history will not appear on their account, your credit history will normally help their FICO score if your credit history is better than theirs. This can help them buy a car or even a home.
A higher investment than the previous suggestion, but also low risk to the donor, is to assist by contributing “gift funds” for a down payment. Gift fund donors cannot be just anyone. Painting with a broad brush, most “acceptable” donors are immediate family members or those who can document a relationship comparable to an immediate family member, but can not be friends, associates or parties to the transaction. If you are contemplating a gift, be prepared to provide a gift letter signed by both the donor and recipient which discloses the relationship of donor to recipient, address of donor, amount of gift, source of funds, declaration of no expectation for repayment, and address of the property being purchased.
Any funds disclosed or used for the purchase transaction must be sourced and documented or “seasoned” funds. Seasoned funds are those assets that have been in the borrowers control for at least 60 days. This is another reason to plan ahead. If you planned months or years ahead, you could set up a down payment savings account for each child, putting money in regularly just as you do for their college expenses. With the account in both names, you can then simply let them use it for their down payment. Don’t forget to consider income tax implications for everyone involved.
The third category is to accept an obligation to repay the mortgage as a non-occupying co-borrower. Co-borrowers for primary residence properties will either occupy the home with the borrower (occupying co-borrowers are typically spouses) or they never intend to occupy the home (family members assisting the borrower). As with gift funds, there are relationship requirement guidelines relative to qualifying for non-occupying co-borrower status.
As co-borrower you have an interest in the property, a responsibility to repay the debt and the payment history on that loan does count on your credit history – their problems become your problems. With good payment history and documentation evidencing the borrower has been making the monthly payments, the debt should not count against your debt load when applying for a new mortgage.
You can help your family members with their home purchase in more ways than one. As is typical with any mortgage transaction, planning ahead and knowing what you can and can’t do can make the process easier. RL