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Can my parents help me with my mortgage?

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? Home-buyers no longer need a large down payment 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 of bringing your parents into your home buying decision.

You should consult your licensed investment advisor for investment advise though. Serving solely as a mortgage brokerage, Stem Lending team can not offer any investment advise.

Despite recent encouraging news regarding wage growth and unemployment rates being as low as they've been, it's still hard to become a homeowner. 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.

Can I access my retirement funds instead of using my parents money?

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.

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. Click To Tweet

It's clear Millennials are overwhelmed with big decisions like home buying. A majority 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.

Can my parents help me with my mortgage?

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 a large portion 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.

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 recent 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.

Parents helping with added cash “reserves”

Another factor that affects younger home-buyers trying to buy a home 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.

While we're not suggesting that you do anything untoward, if a parent adds their 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, they 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 prior asset history when verifying income and assets.

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.

Takeaways

Getting a mortgage is easier than ever with today's online mortgage process making it possible to apply with a full application.

You should consult your licensed investment advisor for investment advise. Serving solely as a mortgage brokerage, Stem Lending team can not offer any investment advise.

However, qualifying for a mortgage with a large 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, 833-600-0490

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