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THE HOUSING SCENE

Helping Your Kids Buy a Home

November 08, 1998|LEW SICHELMAN | SPECIAL TO THE TIMES

WASHINGTON — Lost in the rush to refinance is another boom of sorts--a dash by parents to help the kids purchase a home of their very own. And for the very same reason--record low mortgage rates.

"With interest rates at the level they are today, we're seeing a lot more parents getting into the act," said Thomas Halley of Countrywide Home Loans, the nation's largest independent mortgage company.

"They recognize that this is such an opportune time to buy a home, and they don't want their children to miss out."

Even when loan rates aren't as favorable, though, Mom and Dad frequently lend a helping hand. After all, they're always going to be our children, even when they're grown.

There are basically three ways parents can help: Guarantee the mortgage by co-signing the note, donate the cash for all or part of the down payment and closing costs or lend the money needed to make the deal work.

According to the Census Bureau, gifts and inheritances are the major sources of funds for down payments for 5% of all buyers--both first-timers and repeat purchasers. Loans other than a mortgage are the major source of cash for 3%.

But none of these alternatives is without risk. As a co-signer, for example, you are a co-borrower, which means you are on the hook if the kids don't make their monthly payments.

Rarely Pursue Parents

As a matter of practice, according to Chip Coffay, director of credit policy for Fannie Mae, lenders rarely pursue the parents in a foreclosure. But the fact that your name appears on a defaulted loan will appear on your credit record, and that will make it more difficult to obtain a loan of your own for some time.

Furthermore, if the house is worth less than what's owed, the difference will be treated as forgiveness of debt, and you could be taxed on that amount as income.

But even if Junior makes his payments, the mortgage is considered a debt for the co-signer, and that can affect your own ability to obtain a mortgage--or any kind of loan, for that matter.

"It can be a real liability," says Countrywide's Halley. "Most parents don't see it that way at the time; they're just in a helping mode. But later, they frequently say they never should have done it."

Generally, parents are needed as co-signers when the youngsters are just starting out and don't have the income necessary to qualify for the loan by themselves or they haven't been on their own long enough to establish credit. Co-signers can't make up for bad credit, however, just for a lack of credit.

Co-signers are not required to be on the title to the property, but they must sign the mortgage note. And if the down payment is less than 20%, at least 5% of it must come from the buyer's own funds. Furthermore, if the down payment is less than 10%, most lenders will insist that the co-borrower occupy the property.

If you occupy the property, your income can be used for qualifying purposes. If you don't, the buyer-occupant must be able to qualify for the mortgage based on his income alone.

But lenders may be willing to stretch the normal qualifying ratios by up to seven percentage points. Consequently, the kids' monthly housing expense-to-income ratio can go as high as 35%, and their total debt-to-income ratio can be up to 43%.

According to Richard Deleo, Countrywide's managing director of loan administration, mortgages with co-signers don't go into default any more frequently than other loans. But when they do, he says, the parents are usually the last to know.

To prevent that, Deleo suggests looking for a lender willing to notify all borrowers, not just the occupants, if a payment is late. Otherwise, you won't find out until you apply for credit and your name pops up as a bad risk.

Also, with an advance warning, you can step in before it's too late. "In cases where we contact the parent," Deleo said, "the parents often bail the kids out and save the day."

He also thinks it's a good idea to take your name off the note as soon as the children can qualify on their own. Most lenders will allow the owner-occupant to assume the entire obligation, usually for less than $500. But ask before you take out the loan; some require that the entire loan be refinanced. And that can be costly.

Even if the children have the income necessary to qualify for a loan by themselves, they may lack the money for a down payment. In that case, you can make up the difference with a gift.

But lenders have rules about this too.

For example, donations from relatives must be validated by a signed letter specifying the dollar amount, the date the funds were transferred to the borrower's account and the fact that no repayment is expected.

Lenders also will want to verify that the donor has sufficient funds to cover the gift. But it's best not to transfer the money until settlement. By waiting, you'll not only earn interest on your money, the transfer will be easier to trace.

If you can't afford to give the kids an outright gift, consider lending them what they need.

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