“My child wants to buy a home…”

Orion’s brokers love it when they hear that from a valued client. As a parent, we are sometimes faced with a decision to take our financial support a step or two higher. If your client’s child is ready to purchase a home and you are considering helping them achieve this goal, there are a few different scenarios you can ask your client to consider with varying outcomes for them and their child. And Orion can help!

In some cases, a parent will solely apply for and obtain a mortgage loan and essentially turn the home over to their child. Typically, the arrangement is that the child will make all, or some, of the payments for mortgage, taxes and insurance, either directly to lender, tax collector and insurance company. If this is the case, the parent should consider adding the child to the title of the property. Proof that the child has made those payments will allow him or her to deduct the mortgage interest and property taxes (checking with tax professional first).

Additionally, showing they have been making the payments and living in the property will make it easier for them to refinance in the future, should it be beneficial, and remove the parents from a mortgage obligation and obtain full title. There are also situations where the child makes the payments but pay their parents directly. If this is the case, the parents can then claim the payments as rent and then, if eligible, write off certain expenses. In this set-up, the parents essentially purchased an income property and rented to their child.

Another option many of Orion’s brokers use to co-sign for them on their mortgage application. Most loan programs will allow family members to co-sign for mortgages for owner occupied purposes - what we call "non-occupant co-borrowers." This option is usually utilized when the child cannot qualify for the mortgage, usually because their debt-to-income ratio is too high. Depending on the parent's total income and debt obligations, including their own housing payment, they may be able to co-sign for their child and enable loan qualifying. The parents would be on the mortgage and on title to the property.

The parents are still liable for the loan payment but the child is also responsible and have a lot more control over the situation than in the first scenario. Some parents are concerned, rightfully, how their being on the loan may impact their ability to get a loan in the future; most loan programs have a guideline for such a situation, known as "contingent liability." If the parents can show the child has made the last twelve payments on time, then most mortgage programs will not count the payment for their qualifying.

A third option is to help a child purchase a home by giving them the funds needed for down payment and/or closing costs. When a child has the income to qualify for a mortgage but are short in the amount of cash needed to cover all costs associated with a loan, Mom and Dad can provide a gift for the funds required. This process is straightforward and requires three items from the parent: Proof of funds to gift, proof funds have transferred to the child, a gift letter signed by donor and recipient. There are loan programs that Orion offers that allow for gift funds to cover all the down payment and closing costs. If the resources are available, this is the easiest scenario to enable parental assistance, and the one that has no long-term consequences other than not having those funds available for the parents own use in the future.

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