Helping Your Children Buy a First Home

From day one, parents help their children with almost everything. But sometimes even adult “children” need a helping hand. This is often the case when it comes to buying a home. Fortunately, there are several things parents can do to help their children buy a first home in New Jersey.

Common Obstacles to Homeownership

For some would-be home buyers, the financial path to buying a house can seem overwhelming at first. Qualifying for a mortgage loan. Coming up with a down payment. These things can seem like insurmountable obstacles to a first-time purchaser.

It’s common for home buyers in New Jersey to get a helping hand from their parents. Consider the evidence. A 2016 survey from the National Association of REALTORS® (NAR) found that nearly a quarter of millennial home buyers got down-payment help from a family member when buying a home. Parents were listed as the most common source of financial help.

According to the NAR report: “Overall, the median down payment ranged from 7 percent for millennial buyers to 21 percent for older boomers and the Silent Generation. Nearly a quarter (23 percent) of millennials cited a gift from a relative or friend – typically their parents – as a source of their down payment.”

How Parents Can Help Their Children Buy a Home

All of this begs the question: What can you, as a parent, do to help your child buy his or her first home in New Jersey? There are several ways that parents can come to the “rescue.” Today, we’ll look at two of the most commonly used strategies — down payment gifts and cosigning.

Providing a down payment gift

A down payment gift is exactly what it sounds like. It’s money provided by one person to help another person (the home buyer) qualify for a mortgage loan and buy a house. Specifically, these funds are used to satisfy the down-payment requirement associated with the loan.

Minimum down payments vary based on the type of loan being used and other factors. They can range from 3% to 5%, in most cases. First-time home buyers in New Jersey sometimes have trouble coming up with a larger investment. So they turn to mortgage programs that allow for a smaller down payment. This includes the FHA loan program, as well as conventional loans with private mortgage insurance.

The good news is that many of the loan programs available today allow parents to help their children, by providing a down payment gift. The caveat here is that the money must truly be a gift — not an interpersonal loan. When parents contribute money to their child’s down payment, they must also provide a letter that states they do not expect repayment. This letter goes into the borrower’s file.

Being a co-signer on your child’s first mortgage

Some parents help their children buy a first home in New Jersey by becoming a cosigner on the mortgage loan. If the parent who plans to cosign has good credit and sufficient assets, it could actually help the primary borrower qualify for financing.

When it comes to mortgage financing, there are two main types of cosigners.

• A non-occupant cosigner puts his or her name on the mortgage loan but will not actually live in the home that’s being purchased. This is the most common scenario, when parents help their children buy a home by cosigning.
• An occupant cosigner, on the other hand, actually plans to live in the home that is being purchased.

The mortgage loan requirements can vary, depending on the category of cosigner you are and the type of loan that’s being used. The most important thing to understand is that the person who cosigns on the loan is partly responsible for the payments. So there are some important considerations to make — and discussions to be had — before choosing this route. Certain programs require the co-signor to be in title to the subject property and others do not.

Have questions? Please contact us if you want to learn more about the ways parents can help their children buy homes in New Jersey.