Parents’ Help in Buying Home May Be Tricky

Most housing experts say 1992 is the best time in two decades to buy a first home. Mortgage rates are low. Home prices have moderated. And incentives for first-time buyers abound. But if you’re like millions of young adults across America, you’re sitting on the sidelines for lack of cash.

Could your parents help? Fully 30% of first-home purchases are assisted by parents, pointed out Peter G. Miller, author of “Buy Your First Home Now,” a HarperCollins book.

Still, for the sake of family harmony, he suggests taking a diplomatic approach to the delicate issue of asking parents for money. It’s crucial to consider your parents’ financial well-being as well as your own, he said.

“It’s very presumptuous for kids to think Mom and Dad are automatically going to chip in--as if it’s a natural right. On the other hand, some parents may be happy to participate,” Miller said.

Realty specialists say that too many young adults wait until they’re ready to sign a sales contract--or have already signed one--before they approach their parents. It’s natural to be ambivalent when you’re young and eager to assert your independence. But postponing until the last minute puts needless pressure on parents, who must consider their own finances and whether they have enough money to help your siblings, too.

“There can be familial fireworks if the parents provide for the housing needs of one child but not the others,” Miller cautioned.

Even if your parents are wealthy and willing, waiting until the 11th hour limits your chance to debate the pros and cons of various types of assistance and the tax consequences for all concerned.

“You have to ask the question, What kind of help are your parents giving you? Is it a gift, a loan or an investment?” Miller said. An in-depth discussion should reveal not only your parents’ capacity to assist but also their objectives in doing so.

For those seeking help from their parents to buy a home, realty specialists offer these pointers:

--Consider bringing your parents with you to a prequalification interview with a local mortgage lender.

It’s always a good idea to define the boundaries of your borrowing ability before you shop for a home. A lender can provide more precise financing information than most realty agents, said John Lloyd, a branch manager with Sears Mortgage Corp. And the lender’s analysis becomes vital when parents get into the home-buying act, he says. Your parents need to know how much help you’ll need and what form it should or could take.

--Remember, there are limits on your ability to take on a loan from your parents.

Lenders know a home buyer bearing too much debt is more likely to default, Lloyd said. Anyway, lenders must work within predictable debt-to-income ratios set by such big quasi-government institutions as Fannie Mae (Federal National Mortgage Assn.) and Freddie Mac (Federal Home Loan Mortgage Corp.), which buy billions of dollars’ worth of mortgages. Mortgages that aren’t made according to the rules set by these institutions can’t be sold into this so-called “secondary market,” and that puts the lender in a bind.

Keep in mind, too, that if you’re like many first-time home buyers and take a mortgage backed by the Federal Housing Administration (FHA), you’ll face strict limits on your ability to borrow from your parents (or anyone else) to raise your down payment or closing costs.

Since too much debt can mean a mortgage turn-down, most parents end up pledging their financial help through a “gift letter,” which assures no repayment will ever be required.

--Never pretend that a loan from your parents is really a gift.

“Lenders take gift letters very seriously. They’re not interested in a gift letter where the kids have a side understanding that they’ll pay their parents back,” said Miller, the author.

Your lender probably will want your parents’ gift letter signed and possibly notarized during the mortgage application process. He also will demand that your parents prove they have the means to make the gift--whether it be money in their bank account, an available line of credit on their home-equity loan or another source.

If you claim a loan is really a gift, you’re committing fraud. And the fraudulent document could backfire if you fall behind on your payments and your lender begins to investigate. If you’ve made false statements on your application, the lender could demand immediate payment of your debt in full.

--Consider taking a “sleeper loan” from your parents instead of a gift.

“What the parent is saying is ‘I don’t want to give you the money. But I will give you a loan that’s payment-free until you can afford to pay me back,’ ” said Norman D. Flynn, former president of the National Assn. of Realtors. As long as they’re properly documented and payments are deferred for several years, such sleeper loans are acceptable to some lenders when they make conventional loans.

For many families, this novel concept of the “sleeper loan” offers the best of both worlds. It lets the young person meet the debt-to-income guidelines to qualify for a first mortgage, while assuring parents of repayment after the offspring’s income has increased.

--Never demand that parents provide financial help against their will.

Many parents grasp the difficulty involved in saving money for a down payment and settlement costs, especially during a recession. And they want to help. But others resist helping because they believe their offspring should be cut loose financially once they’re grown.

Whatever you do, don’t try to coerce your parents into helping, Flynn counseled. “It’s not worth it to disrupt and destroy a family relationship over something as minor as money for a house.”

Distributed by Universal Press Syndicate