Buying your own home, especially your first home, is an incredible achievement. For some, it takes years of squirreling away cash to come up with the required down payment. But what if you need help from your parents to get that down-payment & mortgage? In 2018, home-buyers no longer need 20% down to secure their mortgage, but parents’ help can be a significant advantage. At Stem Lending, we’re here to help you understand the pros & cons to bringing your parents into your home-buying decision.
Despite recent encouraging news regarding wage growth and unemployment rates being as low as they’ve been since 2000, it’s still very hard to become a homeowner in 2018. Today’s young adults (Millennials, Gen-Zs) have more student loan debt vs. their income than their parents. Today, it’s difficult to envision covering your daily expenses, minimum student loan debt repayments, and saving for a home.
An alarming trend for many millennial home-buyers has been tapping into their retirement funds early to buy a home. This is generally a bad idea for many reasons (potential tax penalties for example), yet it seems to be gaining traction. In fact, according to a recent Bank of the West’s survey of over 600 U.S. adults ages 21-34, Two in ten millennials who plan to buy a home expect to dip into retirement accounts to fund their purchase.Today's young adults (Millennials, Gen-Zs) have more student loan debt vs. their income than their parents. Today, it's difficult to envision covering your daily expenses, minimum student loan debt repayments, and saving for a… Click To Tweet
The compounding effect of investing through your Roth-IRA, 401(k), or other retirement funds should be used to help you grow your wealth. Withdrawing funds early in order to become a homeowner is very risky. If you are younger than 59.5 years old, however, you are technically allowed to borrow up to $10,000 without penalty if you’re a first-time homebuyer.
It’s clear Millennials are overwhelmed with big decisions like homebuying. In the same above Bank of the West survey, 68% of them have regrets about how prepared they were for the home buying process. If you’re struggling to save for your down-payment, make sure you’ve spent time researching all of the federal, state & local programs that can help you. We’ve even written a blog post on just that in the past.
There are plenty of reasons to look to the “Bank of Mom & Dad” for help in securing a mortgage, if you have that option. Today’s ‘helicopter’ parents view helping their children launch into adulthood differently than those of the past. The average renter is spending ~45% of their after-tax income on rent. Parents would rather help their children get settled while building equity in a home.
But what are the rules for parents when it comes to your mortgage?
Parents Helping With A Down Payment
Many mortgage programs, especially loans from entities like Fannie Mae, Freddie Mac or GNMA (FHA), do not require home-buyers to make their down payments out of their own bank accounts.
As long as your down payment is at or above 20%, all of your down payment can be in the form of a gift, if you’re getting a mortgage backed by Fannie Mae or Freddie Mac (aka, a “conventional” loan). If your down payment will be less than 20%, however, you can’t have 100% of the down-payment as a gift, and the final percentage split will be based on the specific loan type you choose.
With respect to a GNMA loan, specifically a FHA or Veterans Affairs (VA) mortgage, you can also use 100% of the down payment as gift funds, provided you meet the required minimum credit score.
Also important to note, these rules around gift-funds pertain only to homes that you (the borrower & potential homeowner) will be occupying as a primary residence.
To get gift funds approved before closing, your parents must prove that they have the money to give, and that is actually going to be a “gift.” This is often referred to as a “gift letter” where the parent(s) state the name of the donor, the beneficiary of the funds, the time & date, and officially state that the money is a gift and that repayment is not required.
As for proving funds, the parent(s) generally will need to provide 1-2 bank statements showing that the funds are available within the account. Prior to closing, when funds are being transferred into an escrow account, the parents would transfer the money directly into that escrow account.
Extra Tip: from a tax perspective, your parents should be aware that the IRS has an “annual exclusion” on gift taxes up to $14,000 for 2018, which means that a parent can give a child up to that amount, without incurring any additional taxation. If your parents are married and have filed or will file a joint tax-return, then the amount that they can give to any child or family member without incurring an additional gift tax goes from $14,000, up to $28,000 (2X).
Parents Helping With Added Cash “Reserves”
Another factor that affects younger home-buyers trying to buy a home in 2018 is “reserves.” Many first-time home-buyers aren’t even aware that they’ll need to have additional funds in their account beyond the down payment, to close on their home.
Mortgage lenders want to be sure that you can afford to still repay your mortgage, even in the event that something unexpected happens to you such as losing your job, or an unexpected emergency. The amount of cash reserves will vary depending on the mortgage and the size of your loan amount, but expect to need 2-6 months of “Reserves.”
Example: Suppose your total monthly mortgage payment with taxes and homeowners’ insurance is $3,000 a month. If you have $18,000 in savings after closing on the house, you’d have six months of reserves. ($18,000 divided by $3,000 equals six months.)
While we’re not suggesting that you do anything untoward, if a parent adds his or her adult child to a savings account or a checking account for over 1-year, that could take your application over the threshold from “Deny” to “Approve”. There are also many legitimate reasons that a parent would want to have an adult child added as a co-signer on the account; if that parent is elderly, he/she may need help paying bills monthly in a timely fashion. Or, if the parent is living abroad and still maintains a US domestic account, he/she may add an adult child to help with any issues that come up.
Mortgage lenders generally want to see 2-3 months of prior bank history when verifying income and assets, though some of the online mortgage lenders can go back as far as 2 years, so the earlier the better.
When it comes time for verifying those assets as your own to qualify for the mortgage, your parent(s) will likely have to write a letter stating that you (their child) has access to and ownership of the funds as you’ve agreed upon.
Getting a mortgage is easier than ever with today’s online mortgage process making it possible to apply with a full application in under 20 minutes. See Stem Lending’s website for proof of this.
However, qualifying for a mortgage with a 20% down payment or the right amount of cash on hand is often harder than ever for home-buyers who are saddled with student loan debt. Leveraging their parents for help with either the down-payment or cash reserves is a smart option, if you’re lucky enough to have it to use! Call us if you have any questions, 215-608-1050, or email us at email@example.com