The Virginian-Pilot, October 28, 2017
Ready for two interesting statistics?
According to Zillow, 20 percent of homebuyers today receive a monetary gift or loan from family or friends. As well, nearly one-quarter (24 percent) of buyers combine two or more sources to finance their down payment.
Translation: Millennials often need financial assistance from their parents to buy a first home.
First, I think it’s tremendous to see so many young adults moving ahead with homeownership. It’s great for our local economy and helps to ensure that smart, motivated millennials stay here in Hampton Roads.
I also understand millennials sometimes need help from parents to make homeownership possible. From my vantage point, many millennials continue to struggle with a combination of student loans and other debt that make it difficult to obtain a mortgage.
That means when parents step in with their own money, they need to understand the rules and regulations of the transaction so the process goes smoothly.
I’ll break the parent-child mortgage relationship into three categories: co-applicant, gifts and student loans.
Sometimes, parents choose to become co-applicants on the mortgage. In most of these situations, the parent/s become non-occupant borrowers, which means they do not occupy the property but are equally liable for the mortgage and deed of trust.
A co-applicant means that the parent’s income, assets, liabilities and credit will be assessed and considered as part of the mortgage approval.
In some cases, parents elect to give a gift toward the down payment . In that case, the borrower and donor must complete and sign a form called a “gift letter,” which specifies the date and amount given as well as the relationship between the borrower and donor. The letter also contains a statement that the funds are a gift and no repayment is required or expected.
The lender must be able to determine that the gift funds are provided by an acceptable source and are the donor’s own funds. That’s why you may also be required to provide a copy of the donor’s withdrawal slip and/or bank statement and the borrower’s deposit slip and/or bank statement.
Student loans are perhaps the No. 1 reason millennials and other first-time homebuyers struggle to qualify for a mortgage.
At the same time, I have seen many cases when the millennial mortgage borrower is obligated on the student loans, but the parents are actually the ones paying for them.
If the millennial borrower is obligated on a student loan but not actually repaying the debt, the lender may exclude the monthly payment from the millennial borrower’s recurring monthly obligations.
To exclude the student loan from the borrower’s debt-to-income (DTI) ratio, the lender must have the most recent 12 months of canceled checks (or bank statements) from the other party (i.e. parents) making the payments that document a 12-month payment history with no delinquent payments.
Economic forces have made it necessary in many cases for parents to help their children buy a first home. I think I speak for millennials across Hampton Roads when I say “thank you” for the generosity and willingness to help your children become homeowners, an important life milestone.
As long as parents and children understand the rules, they can expect a smooth transaction and the keys to the house.
Shikma Rubin is a loan officer at Tidewater Home Funding in Chesapeake (NMLS #1114873). She specializes in lending for the millennial generation. Sign up today for Rubin’s free webinar, “First-Time Homebuyer Crash Course,” at shikmarubin.com/webinar. You can reach her at firstname.lastname@example.org or 757-490-4726.