Parents as Mortgage Lenders

As lending standards are tighter nowadays, parents can assist their children in buying a home by acting as their mortgage lenders.

“Housing affordability has improved dramatically because of declines in both prices and mortgage interest rates,” says David Stiff, chief economist at Fiserv Case-Shiller, a leading global technology provider serving the financial services industry.

Despite the supposed housing affordability as a result of low home prices and low mortgage interest rates, homeownership is still denied even to the financially qualified due to overly restrictive mortgage underwriting situation, this according to the National Association of Realtors (NAR) President Moe Veissi.

As a result of this tightened lending standards, today's young adults have turned to family members for assistance. According to NAR, last year, one in three first-time buyers bought a home after receiving a gift or a loan from family members.

This trend of assisting family members in buying a home was substantiated by a national survey result commissioned by the Better Homes and Gardens Real Estate. The survey result showed that one in five baby boomers have loaned or gifted their children or grandchildren to buy a home. The survey result also showed that two-thirds of baby boomers expressed their interest to support their children or grandchildren this way.

Parents can either assist their children in buying a home through giving outright cash or by lending money.

Under the law, for the year 2012, a U.S. citizen can donate $13,000 to an individual without the need to pay a gift tax. A husband and wife, therefore, can both donate $26,000 to their child.

Aside from giving outright cash, a parent can also opt to lend money to a child. One is considered a lender if one charges an interest. As of last month, interest rates ranged from 0.19% for loan terms of three years or less to 2.63% for loan maturities of over nine years.

Carol Kroch, head of wealth planning at Wilmington Trust, told Fortune Magazine that one can forgive part of the loan's principal each year by utilizing the allowable $13,000 annual gift tax exclusion.

In the article “Become your kid's mortgage lender” published in Fortune Magazine, Janice Revell wrote, “Experts stress the importance of drawing up a formal promissory note that spells out the terms. If the loan is properly structured as a mortgage and filed, the interest will be tax-deductible for your child. Having a contract also makes estate planning easier. The last thing you want to leave behind is a family squabble over a well-intentioned loan.”

Whether you are a first time buyer, first time seller, empty nester, thinking about selling or buying a home, do contact the Guldi Group. In Southern Maryland, the Guldi Group is the number one real estate team.

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