Helping the kids get their First Home
Guest Post by Darel Ansley of Peoples Bank in Wenatchee
Many homeowners I talk to are excited about all the appreciation they have gained over the last few years, but for us Baby Boomers, the conversation often turns to : how are my kids ever going to get into a home? This has been an issue in the Puget Sound region for some time, but now we are having to address this issue in our markets of Leavenworth and Wenatchee.
With the basic starter home prices growing faster than most people’s salaries, it is getting exceedingly difficult for young people to get into their first home. If you want to help out a child, grandchild or close relative, it is a good idea to talk to a competent lender ahead of time, because sometimes good intentions and logic don’t mesh well with lending rules.
Can I Co-sign?
Cosigning on homes does not carry the same impact as it does on cars; the buyers still need to basically qualify for the payment themselves. Your credit score doesn’t pull theirs up, and if you aren’t going to live there, the rules below for gift money still apply.
Let’s say the kids/grandkids want to buy a house, and starter homes in their area are now $400,000. Let’s also say they have some car payments, credit cards etc, so that they can’t qualify for all that plus the payments on the $400,000. Let’s assume that the kids haven’t had time to save up a bunch of money for a decent down payment, so maybe they have $10,000 in the bank or less.
You are concerned that if you don’t help, they may rent forever, so you generously offer up $40,000 to help them out. Unfortunately, under FNMA lending guidelines, the buyer must contribute 5% of their own funds before utilizing any gift funds. With a $400,000 first home, the kids need $20,000 of their own cash before they can use your gift; bummer. The rule is waived if you gift them 20%, but that means you need to up your gift to $80,000 for this house.
Well, what if I just put the money in their account and pretend it was theirs all the time?
The lender is most likely going to ask for 2 months of printed bank statements showing that they have adequate funds for closing (this is called seasoning). They will also look at every page on the statement to make sure there wasn’t an unusually large deposit. So technically they could use your gift money; the funds just need to be in their account a long time before the home purchase takes place, so that 2 bank statements show the money as theirs.
Another way around this is to let the kids finance 100% of the purchase, and you help them out in other ways. Our assumption above was that they couldn’t qualify with all their other debt payments. So, you use your gift to pay off their other debts, and now their total payments are low enough to qualify. FNMA does not ask for documentation on how the car was paid off. Also, with 100% financing, you can use the gift funds to pay for closing costs, including buying down the interest rate, as long as the buyer contributes just $500 of their own money.
In our example, if you wanted to gift $40,000 and it only took $20,000 to pay off debts and cover closing costs, after the loan is closed, the kids could use your remaining gift of $20,000 to pay down and re-amortize the loan. ($400,000 – $20,000 = new loan of $380,000) Instead of this just reducing principal, you can have the loan payments refigured for the new balance, giving the kids a lower monthly payment. Some lenders charge a $200 fee for this.
So the net effect is you helped them out, and they got into a house without the 5% of their own money; you just had to work within the rules to do it. Because the rule is; if they don’t have 5% of their own money, they can only use gift funds for 100% financing, or 80% and less; but nothing in-between.
There are several things I didn’t cover here, so before you make a decision, find a lender you can trust and let him/her, as well as your tax advisor guide you on the best approach to your scenario.