Your Mortgage : First-Time Buyers Turn to Relatives

With home prices high and big down payments harder to come by, a growing number of would-be buyers are getting financial help from their relatives.

More than 20% of all first-time buyers across the country get some financial help from their parents or others, according to the National Assn. of Realtors.

Agents in pricey California say 36% of first-buyers get help from their relatives, and even 10% of all repeat buyers depend on their parents or others to help with the down payment.

“Prices have gotten so high that an awful lot of people out there need some financial assistance when it comes to buying a house,” said Olga Moreno, a mortgage broker and owner of Bona Fide Financial in Pasadena.

“If your relatives are going to help you out, it’s certainly nothing to be ashamed of.”

If you’re a parent or other relative who would like to see your offspring buy a house, there are three basic ways you could help. You can simply give them some or all of their down payment, lend it to them, or co-sign their loan application.

“Giving your kids money toward the down payment is probably the simplest and easiest way to help out,” said Gary Judis, president of Los Angeles-based Aames Home Loan.

Lenders are more willing to make a loan when there are no strings attached to the down payment, Judis said, and an outright gift will limit the parent’s responsibilities if the loan eventually goes into default.

If you decide to give your kids part or all of the down payment, the lender will probably ask you to sign a “gift letter” specifically saying that the money really is a present and doesn’t have to be paid back.

As a general rule, if your gift is equal to at least 20% of the purchase price, the lender won’t require that your child put up any of the down payment.

That’s because big down payments lessen the chance that the lender will lose money if it must eventually foreclose, said Pamela D. Schumacher of Brentwood-based Camden Financial Services.

But if your gift is less than 20% of the purchase price, Schumacher said, don’t be surprised if the lender insists that your child put up at least 5% or 10% of the down payment on the home.

“There’s a lot lower chance of default when the child has some of his or her own money tied up in the house,” she said.

“When mom and dad are the only ones who have invested in the house, there’s a better chance that the child will just quit making payments if things don’t work out as expected.”

Lending the money to your children can be helpful, but not nearly as helpful as simply giving them the down payment.

That’s because the lender will factor in the monthly payments that your child will have to make to you--a calculation that could result in the lender reducing the size of the loan it’s willing to make.

In fact, some lenders won’t even make a loan if all of the child’s down payment is borrowed.

Off the record, some lenders admit that many parents probably sign a gift letter stating that they’re giving their children the down payment when, in reality, the money is really a loan that must eventually be repaid.

Using this scheme may make the difference between the child getting the loan and being turned down.

Another way that parents and their children sometimes get around the restrictions on loans or gifts takes a little more advance planning.

Let’s say that your son is applying for a home loan. More than likely, the lender will probably ask your son’s bank for the average daily balance in his savings account for the past three or six months.

If the average has been high, your child will have a better chance of qualifying for the loan. But if the average is low and a huge deposit was recently made into the account, it’s a tip-off to the lender that the money earmarked for the down payment probably came from someone else.

To get around this potential pitfall, some children borrow from their parents several months before they start shopping for a home and put the cash in the bank to start drawing interest. This raises their average balance and can improve their chances of getting the loan.

“Remember, though, that we’re going to ask you how you’ve saved up $40,000 or $50,000 when you only make $3,000 a month and you’ve been paying $1,000 a month in rent,” said Bruce Norman of First Mortgage Corp. in Diamond Bar.

“And if you’re thinking about doing something that’s a little shaky, remember that it’s a federal crime to misrepresent yourself on a loan application.”

The third way to help your kids buy a house--co-signing for their loan--can be a bit risky.

“Putting your name on the loan application can make it easier for your kid to get the money because we’ll take into consideration how much both you and your child earn when we’re deciding whether to make the loan,” said Judis at Aames Home Loan.

“But the important thing for you to remember when you’re thinking of co-signing is that you’re just as responsible for making those mortgage payments as your child is,” he said.

“If your kid stops making payments, you’ll be expected to step in and help out.”

It might seem far-fetched to think that your son or daughter would stop making the monthly payments, Judis said. But often, the sudden halt in payments is caused by an event that no one can foresee.

For example, your child might lose his job, suffer a mishap that prevents him from working, or get involved in a nasty divorce where both spouses quit making their mortgage payments.

“Whatever the reason for the nonpayment, it can affect your credit rating--and maybe your pocketbook,” Judis said.

If you’re thinking of helping your child buy a home, or if you’re a grown child who’s hoping to get some help from your folks, also keep these tips in mind:

Lenders like to see financial help come from close relatives instead of long-lost uncles or friends. Most loan officers figure there’s a much lower chance that a borrower will risk messing with his parents’ finances than he would with the pocketbook of someone who’s not as close.

Lenders also tend to look favorably on gifts or loans from employers, churches, synagogues and the like.

If the down payment is a loan instead of a gift, put the repayment terms in writing. Make sure everyone involved understands how the loan is to be repaid, what interest rate might be charged, when the home will be resold and other details.

Don’t forget the Federal National Mortgage Assn.’s new “3/2” loan program. It allows a child or other borrower to get up to $191,250 if he makes a down payment of at least 3% and a relative, employer or a nonprofit group puts up another 2%.

Actually, qualifying for a 3/2 loan is a little easier than obtaining most standard fixed-rate loans. Lenders making 3/2 mortgages in California include Countrywide Funding Corp., First Nationwide Bank, Directors Mortgage Loan Corp., Imco Realty Services and Western Bank Mortgage Co.