Photo: Flickr / millicent_bystander
Even though mortgage rates are at record lows, young adults may still have problems securing the means to buy their first home — and they’re not turning to banks.In 2011, 26 per cent of first-time home buyers received cash for their down payment from a relative or friend, according to the National Association of Realtors‘ “Profile of Home Buyers and Sellers.”
Some parents decide to take it a step further and finance their childrens’ entire mortgages.
Last year, he returned the favour for his son, who not only received a lower interest rate from his dad, but avoided additional expenses like closing costs and appraisal fees.
The notion of parent-backed mortgages is nice, but not all parents can afford it.
“It’s pretty rare,” says Rick Allen, COO of MortgageMarvel. “I think a lot of it has to do with the fact that most aren’t in the position to lend $100,000, $175,000, $200,000. For most of us, that money is being used for other purposes, like retirement.”
That doesn’t mean you can’t help. Individuals can give up to $13,000, and a married couple up to $26,000, before they are subjected to federal gift taxes, according to the IRS.
Allen adds the main perk of a parent-backed loan is that it offers a flexibility not usually found with lenders.
“Parent and child can make any arrangement they want,” Allen says. “A parent is typically willing to do so much more for their child as opposed to the fairly rigid rules attached to a lender-borrower relationship.”
They can choose to give their child a loan with zero interest, or allow them to pay interest only, or even forgive the principal, he says.
Just be aware of the drawbacks to loaning your family money.
“Families just need to understand what the potential impact could be to the relationship if the son or daughter is not in the position to make payments as they agreed to,” he says. “Document the relationship so there are no misunderstandings later.”