Six Little-Known Ways To Help Relatives Finance A Home
Relatives helping relatives buy a first home or move to a more spacious house is nothing new. But now, in many ways, helping family members has never been easier. Lenders are encouraging parents and other relatives to be more flexible in the ways they help a family member afford to buy a home.
1. Make a gift deposit
The latest twist on bridal gift giving is bridal registries within banks. The idea is to help young married couples buy a home by channeling cash wedding gifts to an interest-bearing savings account earmarked for the down payment on a home. Some lenders even have special cards printed to advise wedding guests of the gift option.
Federal tax law allows anyone to make a tax-free gift of up to $12,000 a year to an individual. A husband and wife, therefore, can give $24,000 jointly to their child and $24,000 to the child’s spouse; the recipients won’t owe income taxes on the gift and the donors won’t owe gift taxes.
In addition to an outright gift to a family member for down payment or closing costs, relatives can:
2. Buy down the loan.
Instead of putting cash into a higher down payment, relatives can establish an escrow account that will contribute monthly toward the principal and interest payments for a year or two. This allows young professionals who expect substantial income increases in the future to afford a larger loan sooner.
3. Co-sign the loan.
Lenders can allow a higher loan-to-income ratio if parents or other relatives agree to be responsible for the loan in case of default.
4. Purchase the home on a shared equity basis.
There are many forms of equity sharing in which the assisting relative owns part of the home and shares in the profits when the house is sold.
5. Set up a secured loan or second trust.
The loan will be repaid monthly, with any balance due on sale of the house. The drawback: In the event of a foreclosure, the second trust is paid from proceeds of the sale, if anything is left after the first mortgage is paid.
6. Buy the house.
You could also purchase the home, then rent it outright or provide the young couple with a lease-purchase agreement.
One note of caution: Any loan or equity agreement, even among relatives, should be written in a legal document — which contains a dispute-settling procedure — and recorded on the deed of the home being purchased.
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