Courses in this Department
Want to Invest in Real Estate?
How to Hire a Realtor
What's the Key to Locking in a Mortgage?
How to Improve Your Credit
Watch out for Mortgage Fraud
Need a Buyer-Broker?
Learn How to Best Insure Your Home and Save Money
Avoid Trouble on Your Kids
Downward Direction for Down Payments
How to Hire a Contractor
Save Money by Cancelling Your Private Mortgage Insurance ("PMI")
Crunch the Numbers and Drop Your Private Mortgage Insurance ("PMI") Payments
Who's Watching your Deposit Money?
Remodeling Value: Your Best Investments
More Than One Way to Pay for Remodeling
File Your Income Tax Returns Early and Save Money
Types of Loans Available for the Self-Employed
Top Five Homeowner Tax Saving Ideas
Avoid Trouble on Your Kids' Mortgage
first-time home buyers are getting a financial shot-in-the-arm from their parents.
It's easy to understand why. With mortgage rates better than ever, young people
sometimes just need a boost from their parents to afford their first home? But
before they help their kids make a down payment or qualify for a loan, parents
should know the risks of playing financial benefactor, says Lew Sichelman in The
1 - Co-signing
for a mortgage can be tough early-on in life if your income isn't high enough,
or you haven't yet established a credit record. Parents can help by co-signing
the note and guaranteeing the mortgage. Remember, at least 5 percent of the down
payment still must come from the borrower's personal funds on a co-signed mortgage,
so long as the down payment is 20 percent or less which is very likely. The advantage
is that the lender may be more generous on the qualifying ratios for income and
debt. The kids could qualify with a monthly expense-to-income ratio as high as
35 percent, and with a total debt-to-income ratio up to 43 percent. That's seven
percentage points better than normal.
the next time you apply for a loan, the lender will include any mortgage you have
co-signed into YOUR debt-to-income ratio. And guess who's responsible if the kids
don't make their monthly payments? Although lenders don't typically go after parents
in a default situation, the end result is a spot on your credit record. That's
all you need to make it more difficult to get a loan of your own. In situations
where the house is worth less than what's still owed, you could be financially
liable for taxes on the difference. In the worst-case scenario, parents may regret
co-signing for their kids after paying for their kids' blown financial obligations.
The problem is when young people default on a loan,
they frequently don't bother to tell their parents. You may not find out until
you apply for a loan and discover it on your credit record. Avoid nasty surprises
by telling the lender to notify all borrowers, including you as co-signer, whenever
a payment is late. That early warning also gives you the chance to bail the kids
out, if necessary, before things get out of hand. Another way to reduce your long-term
risk is to take your name off the note as soon as the kids can qualify with their
2 - Down Payment Help
Parents who want to help
on the down payment are allowed to make up the difference in a gift. But lenders
will want certain assurances. You'll have to sign a letter specifying the gift
amount and when the funds were transferred, that no repayment is expected, and
that you have sufficient funds to cover the gift. Wait until settlement before
transferring the funds--they'll be easier to trace and you can collect interest
in the meantime. You may wish to consider loaning the kids money, too. Borrowed
funds can be used as part of a down payment so long as some asset secures the
funds. The lender will want to verify that the loan is secured. In any event,
make sure you lay out the terms of your loan in writing. If the kids don't pay
you back, you'll need documentation to be able to write off the loss on your taxes.