Getting Mom and Dad to co-sign a jumbo mortgage is a tough sell all around.
The practice is rare, but a few lenders will allow parents to help their adult children qualify for jumbo mortgages, which exceed conforming-loan limits of $417,000 in most places and $625,500 in high-price areas such as San Francisco. A typical scenario: a first-time home buyer whose salary has a strong upward trajectory but who hasn’t been on the job long enough to meet income requirements to buy property in a pricey locale, such as New York, says Ray Rodriguez, regional mortgage sales manager for Cherry Hill, N.J.-based TD Bank, which lends in 15 East Coast states.
TD Bank allows parents to co-sign because it feels more secure having an affluent relative share liability on a mortgage, says Mr. Rodriguez. Other lenders, such as Quicken Loans and Citi Mortgage, disallow “non-occupant co-borrowers” as they’re called, because they want the person buying the house to be living in the house.
Families could apply for an investment-property mortgage, a loan product that allows non-occupant co-borrowers. Interest rates for these are typically only a half of a percentage point higher than a jumbo mortgage and with a higher down payment, such as 40%, that difference could be as little as just one-eighth of a point.
Sometimes, parents will buy a multifamily residence and rent one unit to a child, with rental income from the other units covering mortgage payments.
Here are some other factors to consider. As always, borrowers should consult a tax accountant or lawyer for specific rules.
• Liability. If the child loses a job or for any reason misses monthly mortgage payments, the parent is not only liable for the money owed, but may also end up with a damaged credit score.
• Estate issues. If a parent is on the property title as well as on the mortgage (not always required by lenders), pay attention to the ownership status, says Lee Wagner, a partner at White Plains, N.Y.-based real-estate law firm Ziccardi & Rella. “Joint tenants with right of survivorship” means that in the event one of the borrowers dies, the property will transfer directly to the co-owning child/couple. If instead the classification simply is “tenants in common,” the deceased borrowers’ share may be divided among other heirs, such as siblings. In that case, the child co-owner may have to buy out his siblings’ shares or sell the property to settle claims, Mr. Wagner says.
• Tax benefits. If annual or lifetime gift exemption limits aren’t exceeded, a bigger tax benefit may come from a parent gifting the mortgage payment amount to the child. This gives the child a double benefit: tax-free money and mortgage-interest deduction.
Anya Martin
WSJ