Dad, can I borrow the car? Mom, can I borrow this dress? Hey, can I borrow $250,000? Parents are used to being asked for things by their kids from a very early age. When they’re young, the requests can be a bit benign. Yet as they get older, the things being sought after get a bit higher priced. There’s a big difference between borrowing a fishing pole and borrowing the car, right? Yet at some stage as they grow into adulthood, start their careers and move away, you might be asked to help buy a home. But if you don’t have the $250,000 in cash lying around or even if you do but you’re not inclined to give it to them, there are ways you can help.
One of the biggest obstacles first time buyers have in buying a home is coming up with the necessary funds for a down payment and closing costs. You remember that all too well, don’t you? It takes some time to save up the necessary funds each month until you reach your goal. Today, home prices are much higher compared to when you might have purchased your first home. That means the amount needed for a down payment can be much more than what you paid. But instead of doling out $250,000 you can provide them with a financial gift. Acceptable donors for a financial gift include immediate family members, legal guardian, domestic partner or a qualified non-profit.
A gift as it relates to getting a mortgage means you’re going to transfer whatever funds you’re going to contribute directly to the settlement agent or transfer to their bank account. With a gift, you’ll need to provide a letter stating the amount of the gift and that the funds are not expected to be paid back. Lenders are required to verify the source of all funds in a transaction and if your financial gift just simply shows up at closing without notice, things will come to a halt. With the letter and documentation of the source of the funds, you can avoid any problems as the loan progresses.
Perhaps the most agreeable mortgage program as it relates to gift funds is the FHA loan. Conventional loans certainly accept gifts but they also require the borrowers to have at least 3.00%-5.00% of the down payment coming from their own account unless the down payment is at least 20% of the sales price. You can also think about cosigning on the mortgage with them. This is a bigger commitment. In fact, it is exactly that, a commitment.
When you agree to cosign it’s going to be more than just signing the loan documents and filling out an application. You will be completely documented in much the same manner as when you financed your home. You’ll need to provide copies of your pay check stubs and your W2 forms. If you’re self-employed, then two years of both personal and federal income tax returns will be needed. Bank statements are also a requirement. Your credit report will be pulled and reviewed and credit scores evaluated.
But here’s the important part about credit. Once you cosign, you’re obligated to pay the mortgage even if your kids will be making the payments. The new mortgage will soon appear on your own credit report which then of course means any late payment on that mortgage will be reflected on your report, even if you were unaware of the status of that payment. Before you agree to cosign on the mortgage you’ll want to review your children’s credit report. If there are some occasional late payments showing up on things such as credit card accounts or car loans, you might think twice about cosigning a mortgage with them. It might be hard to say “no” when you’re asked to help buy a home but financial responsibility is an important lesson to learn and if it isn’t learned at a young age it will be harder to appreciate those lessons later on.