From the first Band-Aid to phone calls home, mom and dad have supported you through thick-and-thin. Now that you’re financially stable, helping them buy a new home might seem like a dream come true.
It’s also a step that is more complicated (and risky) than you might realize. From cosigning to down payment support, there are a number of ways you can help. But before you jump in feet first, it’s important to carefully consider the pros and cons of each.
This can be one of the simplest ways to help your parents secure a new home, especially if they have a limited income. Getting approved for a mortgage is heavily dependant on not only the loan-to-value ratio, but the overall debt-to-income ratio of the borrowers. This means cosigning could improve your parent’s debt-to-income ratio (DTI). This could help them get approved for a bigger mortgage than they might otherwise.
What’s the catch? Cosigning their mortgage means you remain financially responsible throughout the lifespan of the mortgage. This is true whether you live with them or not. If your parents fall behind on their payments, the debt will also affect your credit score.
Down Payment Assistance
Alternatively, down payment assistance allows you to help your parents without putting your credit in jeopardy. To avoid the pricey gift tax, it’s best to plan ahead. (The maximum gift allowed is $14,000. You can gift each of your parents the full sum and so can your spouse without being parent’s being taxed.)
What’s the catch? Giving your parents enough for a down payment is a hefty sum! This is money that could go in your own retirement fund, be used for college tuition payments or simply make life a bit easier.
Renting to your parents is another way to help them move into a new home without attaching your credit future to theirs. Buying a second home has the added perk of tax deductions. You could qualify for everything from mortgage interest and property tax deductions to maintenance costs and depreciation expenses.
What’s the catch? Second homes are considered investment properties. Typically, the mortgage rates attached to them are a bit higher than you’ll be charged for your primary residence.
Ready to start exploring your options? Contact a loan officer today.