More Kids Turn to Parents for Mortgage Help

October 6, 2011

The “bank of mom and dad” is increasingly becoming an option for young adults who otherwise may not have been able to afford or qualify for a mortgage for a new home. Even though mortgage rates are at record lows, tight credit standards have prevented many young adults from taking advantage of those rates.

Parents who no longer want to risk their money in the stock market, therefore, are turning to financing their childrens’ mortgages, USA Today reports. This "is an opportunity to create a win-win," Timothy Burke, chief executive of National Family Mortgage, a company that offers intrafamily loan services, told USA Today. 

The children are able to avoid paying closing costs, appraisal fees, and other expenses that are generally charged by a lender and they’re usually able to get an even lower interest rate on the loan. Meanwhile, the parents are finding the interest rate charged on the intrafamily loans still offer them higher returns than they’d be able to earn on other investments.

National Family Mortgage say they’ve helped families finance more than $12 million in loans, anywhere from an $18,500 down payment to a $1.17 million refinancing. Burke told USA Today that another perk of intrafamily loans is that it sometimes allow clients to make all-cash offers on a home too, which has become more important in making competitive offers when bidding on foreclosed properties. 

The number of first-time home buyers receiving loan help has steadily been growing. For example, in 2010, 9 percent of first-time home buyers had received a loan from a relative or friend. In 2009, that number was 6 percent, according to research by the National Association of REALTORS®.

However, some parents who want to help their children with buying a home may find it a better route to get a mortgage on their own, buy the home, and then just rent it back to their children, some housing experts say. Parents who finance a child’s mortgage or help with the down payment need to make sure they follow IRS guidelines, particularly in avoiding problems with gift taxes. 

Source: “More Parents Finance Their Kids’ Mortgages,” USA Today (Oct. 5, 2011)