Owning a home is out of reach for many, especially if you live in places like Los Angeles or San Francisco where only a quarter of residents can afford to buy a median-priced home, according to a Harvard University report. But it can be challenging anywhere these days, from Miami, Florida to Calgary, Alberta which is why more and more parents are looking for ways to help their children buy a home.
From offsetting savings to gifting a deposit, there are many ways that parents can help children get a mortgage and finally become a homeowner.
A Family Offset Mortgage
Certain lenders offer something called a family offset mortgage. This type of mortgage allows parents to offset their savings against their child’s mortgage. They put their savings into an account that’s linked to the mortgage so that the child will pay less interest, making the monthly rate more affordable. The savings are used to offset the amount of the mortgage the interest is paid on. The downside is that the savings are unlikely to earn interest, but it can be a good way for parents to help without having to give their money away. The money will be locked in for a period of time, typically until around one-quarter to one-third of the mortgage is paid off.
Acting as the Lender
Parents who have enough money to invest may want to consider acting as the mortgage lender. They can earn interest but offer terms that the child can afford, such as no down payment or closing costs. It can often be a win-win for both parties. To prevent their help from being considered a gift for tax purposes, parents must charge at least the Applicable Federal Rate.
Gift the Deposit
One of the easiest and most common ways to help kids buy a home is to do a gifted deposit. That’s just what it sounds like, you’ll give them all or part of the deposit without any obligation to repay it. That will help the borrower access a mortgage loan and give them access to better deals if it increases the amount of their total deposit, for example from 5 to 15 percent, or from 15 to 20 percent. Mortgage lenders require proof that the money is a gift, so you’ll likely need to sign a declaration stating that you don’t want the money back and don’t expect to have any legal interest or equity in the property.
Acting as the Co-Borrower
While it’s a big risk, parents can also act as a co-borrower to help children with a limited credit history, or those who have a high debt-to-income ratio. This is common practice but it’s important to understand that you’ll be putting your own credit score on the line. If you plan on making a big purchase in the near future, being a co-borrower could make that challenging even if the payments are made on time. Basically, it means that you’ll be applying for the mortgage too, meeting the lender’s requirements and signing the papers at closing too.