Would You Pay Your Kid’s Mortgage? Creative Ways to Finance a Home, Part 1

Would You Pay Your Kid’s Mortgage? Creative Ways to Finance a Home, Part 1

With more banks saying no to loans, homebuyers and sellers are getting creative. Today and Friday we’ll bring you fresh ideas to finance a home even as banks make it harder to do so.

Parents Becoming Lenders

Before your roll your eyes and think this is a story about the Hiltons bankrolling Paris and Nicole, realize this is not just something the rich can or should do. This is actually a great option for the average American family.  USA Today covered a story about the Driscoll family of Maryland: In this case, the senior Driscolls loaned money to their son Dan for his mortgage at a lower rate than currently offered by banks. This saved Dan on the monthly payments and interest; but additionally, he was also able to “avoid paying closing costs, appraisal fees and other expenses charged by a traditional lender.”

Driscoll, Jr. isn’t the only one reaping benefits from this arrangement. Since Dan’s parents are retired, they live on the interest their savings can bring them. As we all know, interest on savings these days is dismal- bank accounts as well as CDs bring in as little as—or less than—1%. By instead loaning money to their child and working out an interest rate and schedule of payments with help from an attorney, they were able to make better interest overall on their savings.

“Family mortgages work, Driscoll says, ‘if your children are honest, trustworthy and responsible.’”

It’s certainly an interesting idea, though not risk free. Parents who loan money to children who later default on the loans will have heavy decisions to make. But to minimize the risk, interested families should contact the National Family Mortgage company that sets up and services intra-family loans. This company has thus far helped thousands of Americans with these arrangements, boasting “$13,910,443 in loans between relatives; $7,654,759 in interest kept in family; millions of dollars saved!” On its website, the company assures us that these loans are tax deductible as well. (!!)

Cheaper than Co-Signing

Applicants today may still be refused a home loan even if they seem qualified. The media is rife with stories in which people with jobs, good credit, and 20% down are denied by banks. This happens very often to freelancers/independent contractors or anyone whose income varies from month to month. In these cases, banks may suggest the applicant ask a parent to co-sign the loan.

However, even if parents are willing to do this, the interest rate on a co-signed loan is actually higher than a traditional loan, sometimes by as much as .25% .

Taking Advantage of the Foreclosure/Short Sale Market

Another benefit of an intra-family loan: buyers might have better access to the increasing number of bargain priced distressed properties on the market now. Typically, these homes go most quickly to cash buyers because nothing can go wrong with that kind of “financing.”  If parents can loan their children cash (at a an agreed interest rate), those children can compete with other cash buyers and perhaps land a home for an excellent price, making the investment even better for all concerned.

Financing the Down Payment Instead

For parents with less money to loan, or who prefer a less risky endeavor, the option of financing their children’s down payment offers similar benefits, with less risk. Today, borrowers are increasingly asked to come up with a 20% down to qualify for mortgages. The Center for Responsible Lending estimates that” it would take a typical household 14 years to raise enough money to meet that requirement.” Parents, if they can help, offer an excellent alternative.

Keep in mind though, bank want to know where money came from. They may not look kindly on a down payment that has to be paid back. You would want to be sure you know the legal ramifications of a loan vs. a gift when working on a bank loan application.

One option worth looking into: The Federal Housing Administration allows buyers to “borrow funds for their down payments from their parents or grandparents,” and has successfully structured several family down-payment loans for FHA-insured mortgages.

So what do you say, readers? Does this sound like a win-win or an invitation to family feuds from Hell? Would you finance your kid’s mortgage?