Mortgage News

Owning a home is a dream that is shared by millions and millions of Americans. Earlier in the decade the national home ownership rate reached a record high as almost 70% of all families owned their own home. This number has fallen somewhat during the present recession, however the dream of obtaining home ownership has remained a goal for many who are presently renting. This year many Americans will be able to reach their goal of home ownership because of record low interest rates and lower home prices that have made owning more affordable than ever. In addition, the government has offered a tax credit of up to $8,000 for first time buyers. It is clear that this is the time to buy your first home.

Unfortunately, many lending programs now require a greater down payment and clean credit as opposed to what was required only a few years ago. This means that even though we have a great buying opportunity, many first time buyers may need additional help in order to purchase their first home.

When considering purchasing it makes sense to consider traditional sources of aid such as our families. Traditionally, American parents have been a significant source of help when their children decide to become part of the community of homeowners. Here are a few important ways in which parents can help their children purchase real estate—

Alleviating cash shortages through gifts. According to major surveys, the number one obstacle to owning a home is a shortage of cash. Though many mortgage programs now require small downpayments in order to purchase a home, some capital must be provided by the prospective homeowners. Most mortgage programs allow some or all of the liquid assets needed for the downpayment and/or closing costs to be provided through a gift from an immediate relative such as one's parents. The most liberal programs with regard to the provision of gifts are FHA (Federal Housing Administration) and VA (Dept. of Veteran's Affairs).

FHA is a very popular program for first-time buyers and it allows all of the capital necessary for the purchase, typically 3.5% of the sales price, to come from a gift. FHA even has a special bridal registry program and allows unsecured loans from immediate family members.

VA loans are for the benefit of active military and veterans of military service. The majority of VA loans require no downpayment and therefore the use of gifts would typically be for those who need help with closing costs, especially when sellers are not contributing towards such costs.

Conventional programs tend to be less liberal with regard to the use of gifts. In many cases conventional programs require at least 3.0% to 5.0% of the cash needed for purchase to come from the purchaser, unless the gift constitutes 20% of the total purchase price of the home. More recently, low-to-moderate income homebuyer programs have been introduced which have liberalized requirements regarding gifts.

Purchasing together for income support. Purchasing a home with your children may enable those who do not have enough income to qualify for a mortgage to finance their home purchase. Once again, mortgage programs vary with regard to the allowance of co-borrowers and FHA has the most liberal requirements. Under the FHA program, immediate family members can help a relative purchase without living in the home themselves. VA is the most stringent with regard to co-borrowers, as only the spouse or another veteran who will live in the home can co-sign. Conventional programs vary with regard to their requirements, but once again these have become more liberal with the growth of low-to-moderate income programs.

Purchasing together for credit support. One area a parent can help is for children who have a substandard credit history. It should be noted that adding a co-borrower with a clean credit history in no way erases the existence of a poor credit history. On the other hand, a strong co-borrower may be able to make the difference in cases where the credit history of the child is close, but not quite up to standards.

Cash, income and credit. The three major barriers to obtaining a mortgage and reaching the American dream of homeownership. Help for overcoming these obstacles may be no further away than going back to your roots. With rates so low, a tax credit available and home prices down, there are many reasons to act now. The help of parents may surely be needed to overcome the obstacles presented by tighter credit requirements in this interesting environment...q