From parent to mortgage lender: Helping a child buy a home.
Pity the young person or couple who want to buy their first home in Chicago or its suburbs. Rising home prices make scrapping together a significant down payment a true challenge for youngsters just starting their professional careers.
Fortunately, these young would-be homeowners can always call on mom and dad, and their wallets.
Parents have helped their children purchase homes for decades. This help comes in several forms: Some parents gift their children a certain amount of money to be used as a down payment on a home. Others co-sign a loan for them, while still others share the equity in a home with their children.
Mortgage loan officers say this practice can help young borrowers get into homes they could otherwise not afford. They also say that gifts from parents and relatives are becoming less common as more young borrowers instead turn to specialized loan programs that allow them to purchase homes with little or no down payment money.
There are three main ways in which parents and relatives can use gifting to help their family members.
First, they can give them a financial gift to use as a down payment. Being family is important here. Lenders view money passed from a relative or parent as a gift, one that these family members won’t require their children or family members to repay. To verify this, lenders require the gifting party to sign a Gift Affidavit. This form states that the family member gifting the money has the ability to pass along these funds and is giving them with no expectations of ever seeing those dollars again.
Borrowers must meet some basic requirements, too. They need to have available in their own financial accounts anywhere from 3 to 5 percent of the home’s purchase price. This is only part of the story, though. If parents or relatives gift 20 percent or more of a home’s purchase price, most lenders will waive the 3 to 5 percent requirement. Lenders do have differing policies, though, so borrowers should make sure to clarify this with their own loan officers.
Parents should be aware of some tax implications of gifting. A parent is allowed to give a gift of $10,000 to one person in a given year without suffering any tax consequences. Anything over that figure, and parents will be taxed. Both parents can gift a total of $20,000 to a child without facing gift taxes, while a married couple can gift $40,000 to their child and his or her spouse without suffering tax consequences. Mortgage experts recommend that parents and their children meet with financial advisors before making any gifting decisions.
As a second way to help, parents can co-sign on the mortgage loan for their children. By doing this, parents are agreeing that if their children default on their mortgage loan, they instead will make the house payments. Borrowers will still need to meet a lender’s required debt-to-income ratios.
Parents might want to proceed with caution here. The mortgage they co-sign for will appear on their credit reports. Lenders could count it against them when they apply for future credit.
Parents hoping to help their children purchase their first home have a third option: They can engage in an equity-sharing partnership.
Under such an arrangement, parents can purchase property with their children by providing the down payment on a home while their children live in the property and make its mortgage payments. Both parents and children in this arrangement can qualify for tax deductions, though the IRS will require a written equity-share contract. Both parents and children must also take title to the property.
Much like in a co-signing situation, parents become responsible for mortgage debt and property taxes if their children can no longer make their mortgage payments.
And about that stipulation that a gift not be repaid? That’s more for the mortgage lender than it is for the parent and her child. Children and parents can agree to a repayment plan if they want. By signing a Gift Affidavit, though, parents assure mortgage lenders that the borrowers won’t have to contend with an additional loan repayment while paying off a mortgage loan. This gives loan officers the freedom to qualify a borrower for a larger monthly mortgage payment. | 
