Your mortgage is my mortgage: How parents are financing a child’s home

With all-cash offers dominating the housing market in some highly competitive cities, first-time homebuyers are finding themselves shut out of negotiations, particularly for the more affordable and in-demand starter homes.

Saving enough for a down payment and closing costs has always been a challenge for young home buyers. But in tight real estate markets, the old standby of 20 percent down with a traditional mortgage loan isn’t enough to win a home.

These kids might once have looked to mom or dad for help with a down payment, but now they’re approaching their parents with a much bigger request: enough funds to make a full cash offer.

That means instead of ponying up some extra cash, parents today are extending a dramatic new kind of helping hand. They’re refinancing their own homes to fund the full cost of their child’s home purchase. In turn, their son or daughter agrees to mortgage their own newly acquired property and pay their parents back in one lump sum.

Potential pitfalls
Families interested in pursuing this kind of mortgage “trade” should consult with several advisors well in advance. In addition to the legal protections parents may want in place to ensure their son or daughter actually pays them back, other considerations such as gift taxes, refinance waiting periods, and loan qualifications may come into play.

Money always has the potential to create family conflict, and you don’t want any unpleasant surprises cropping up. Imagine, for instance, your son or daughter pays well over appraisal value to win his or her new home. It’s unlikely a lender will remortgage the property for more than the appraised value, leaving a financial gap in the amount your child can pay back.

Under advisement
For safety’s sake, be transparent with your lenders or consider working with one designated banker who understands and supports the full arrangement, from the parents’ mortgage loan through the child’s refinance.

Parents should also feel comfortable asking to vet their child’s financial position before entering into such an arrangement. Some may even want to negotiate a stake in future real estate gains, in exchange for their investment and risk. Consult a lawyer for help in setting up special requirements, payment plans and other terms.

Ready to pay
In hot real estate markets, sellers have the leverage and are free to turn up their nose at contingency offers. Housing stocks are down, and in many communities bidding wars are the new normal.

Buyer with the all-cash resources to get the deal done, and get it done fast, are rising to the top in negotiations. Sellers prefer cash offers because they eliminate the typical 30 to 60 day waiting period for traditional mortgage loans and reduce the chance buyers will walk away from the deal.