After years of getting help from mom and dad, some adult children are returning the favor and buying their parents a house.
Not all lenders will allow adult children to co-sign for their parents on jumbo loans-those that exceed $417,000 in most areas and $625,500 in some high-priced places, says John Walsh, CEO of Milford, Conn.-based Total Mortgage. However, enough lenders allow it that most children who want to help home-buying parents, whether working or retired, should be able to co-borrow, Mr. Walsh says.
When permitted, all co-borrowers must meet minimum credit score guidelines, but the incomes and assets of all borrowers can be pooled. Lenders typically still require that the occupying owner qualify to make the payments based on his or her own income, so the down payment should be sufficient to reduce the loan amount to a qualifying level, Mr. Walsh says.
‘If co-signing isn’t an option, adult children could gift money toward the down payment.’
If the child already owns a home, the lender may consider the new property to be a second or investment home, meaning a slightly higher interest rate.
If co-signing isn’t an option, adult children could gift money toward the down payment at an amount that would let their parents qualify for a mortgage based on their income. As long as the gift falls within Internal Revenue Service limits, it has the benefit of being tax-free for the parent.
However, there’s another compelling reason why elderly parents should be the only names on the mortgage and title, Mr. Carbray says. If in the future, one parent has to move to a nursing home and applies for Medicaid long-term-care coverage, the other spouse is allowed to maintain their primary residence up to a certain home-equity amount, he adds. That equity amount varies by state, but the point is the house may be one asset that Medicaid cannot require be sold before benefits kick in for the other spouse, Mr. Carbray says.
Here are a few more considerations when deciding how best to help a parent qualify for a mortgage:
• Probate nuances. If a child’s name is already on the title and all owners are specified as “joint tenants with right of survivorship,” the property will transfer directly to the child upon a parent’s death.
However, in cases of “tenants in common,” the parents’ share of ownership may be divided among all heirs, forcing the child co-owner to buy out the heirs’ share or sell the property to settle claims.
• Reduce loan amount. Because government-backed loans allow a non-occupying co-borrower, a conforming loan combined with a second mortgage or home-equity line of credit may be another option.
• Investment advantage. If the child buys the property with the parent as a tenant, not only are there no inheritance issues, but repairs and improvements may be tax-deductible. Mortgage interest rates, however, are typically higher for investment properties.