Many times I meet home buyers that want to buy but due to their circumstances just can’t for reasons such as credit issue, not enough for down payments or not enough time on their jobs but relatives can help. It’s difficult to see these kind of clients not being able to pursue the American dream. I also have had many home buyers get help from relatives to help them get started with their first home purchase. Many would think that these home buyers need to wait to purchase until they or are able to buy on their own, but there are way that their relative can help them get started in their dreams of becoming a proud home owner and stop throwing money out of the window for renting a place that just doesn’t feel like a true home. There are some rules that apply, but I thought to share these tips with you in hopes it would help you become a proud home owner.
Relatives helping relatives buy a first home 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 $13,000 a year to an individual. A husband and wife, therefore, can give up to $26,000 jointly to their child and $26,000 to the child’s spouse once a year; the recipients won’t owe income taxes on the gift and the donors won’t owe gift taxes. The tax-free gift can be repeated the next year to increase the first-time buyer’s available down payment cash.
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, your relatives can establish an escrow account that will contribute monthly toward your 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 your home and shares in the profits when the property 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 home. 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 home.
Your relatives could also purchase the home themselves, then rent it to you outright or provide you 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.
More On Equity Sharing With Love
Did you know your parents or relatives can profit from equity-sharing while helping you own your first home?
Equity sharing is a two-way street that lets everyone in the family reach their real estate goals: you, your parents or grandparents or your rich uncle and aunt:
With your investor/co-owners’ cash contribution, you could buy a home you couldn’t otherwise afford.
With you sharing costs, your co-owners enjoy both tax benefits and investment profits.
Example: In return for a 50% (figure negotiable) ownership interest, your co-owners make a $20,000 down payment on a $100,000 home.
You get to live in the house and pay:
Half the mortgage payments.
Half the property taxes.
All the maintenance costs.
You can claim tax deductions for:
Their half of the mortgage interest.
Their half of the property taxes.
Your co-owners do not live in the house. As investors, they can depreciate their half of the house (not counting the value of the land).
When the home is sold, you and your co-owners divide profits (or loss) 50/50. Out of your share, in our example, you repay your co-owners the $20,000 original down payment.
Such a system will work on any ownership percentage the co-owners agree to (50/50, 60/40, or a 25/75 split, etc.). This approach can also be used in cases where co-owners are not related.