ogc163
Superstar
By
Leigh Kamping-Carder
Call it the mortgage merry-go-round: Parents refinance their home to fund the full cost of their son or daughter’s desired home. This allows the child to compete as a desirable all-cash buyer in an area where bidding wars are common. Then, when the purchase closes, the child refinances the new home and pays the parents back.
Sellers often prefer cash because transactions can close quickly without making a deal contingent on financing. This is particularly important in bidding wars: If the purchase price is above the list price and appraised value, it may be tricky to get a loan, said Kas Divband, a Washington, D.C., agent with Redfin. Mr. Divband said he has worked on six deals where the buyer was relying on a parent’s mortgage to make an all-cash offer.
The strategy is also evidence of how difficult it is for millennials getting into the housing market for starter homes, where competition is the fiercest. Even those with high-paying jobs and hefty down payments are losing out, particularly in cities with strong job markets for young people, such as Washington, Boston and Seattle, said Nela Richardson, Redfin’s chief economist.
Redfin agent Cody Coffman recently worked with a 20-something Olympic athlete who paid $2.8 million for his first home, a newly built five-bedroom house in Los Angeles’s Venice neighborhood that was listed for $2.758 million. His parents took out a home-equity line of credit, or HELOC, to give him the full purchase price, allowing him to beat out four other offers. “
“Educating him on how to talk to his parents was probably the most difficult part,” Mr. Coffman said, since it wasn’t every day their son asked for $2 million. The athlete worked with a loan officer who vetted him before the purchase and also handled his parent’s line of credit.
To be sure, this move will not work for everyone. Parents must have enough equity in their homes to make a refinance worth it, and the same goes for the child’s new home. Both parties must be willing to take on the added hassle and cost of two loans. And mixing family and money is often fraught, especially when large sums—and people’s homes—are involved.
Here are a few more things to keep in mind:
Loan options
Parents have several options for using the equity in their homes, including a cash-out refinance, which allows borrowers to refinance an existing mortgage plus an additional amount and take the difference out in cash; a home-equity loan, which is a loan against the value of a home, including a second mortgage; or a HELOC, which works like a credit card, allowing homeowners to qualify ahead of time and withdraw funds when the child is ready to close.
Finance fail
The biggest risk is that children will not qualify for a loan—or as big a loan as expected—especially if they pay above the asking price or the market cools. To help avoid this outcome, let the lender know your plans ahead of time, Mr. Divband said. It may be more convenient to use one loan officer for both transactions.
Note that some lenders want buyers to live in a home for three to six months before refinancing. An alternative is a delayed-financing mortgage, which allows a buyer to purchase the home in cash and refinance the day after closing for up to 80% of the value of the home, said Peter Lucia, a production manager at Brecksville, Ohio-based CrossCountry Mortgage.
Think like a lender
Parents should do the same kind of due diligence as a lender, including vetting children’s finances. Tim Manni, a mortgage expert with NerdWallet, a San Francisco-based personal-finance company, recommends working with a lawyer to draw up a family loan agreement setting out repayment terms and other stipulations. For example, parents may want to ask for 5% of the eventual sale price. Buyers may also want to get a home inspection.
Consider the costs
A purchase mortgage or a refinance would typically cost about 2% of the loan value, Mr. Lucia said. Most closing costs would apply to two loans instead of one. Luckily, prepayment penalties are rare on primary-residence loans, though they might apply on investment properties, Mr. Lucia said.
Tax tips
Gifts of more than $14,000 per person per year are subject to federal gift taxes for the giver, which could apply to both parents and children. Both parties should consult a tax professional.
Millennials’ New Weapon in Bidding Wars: A Parent’s Home Equity
Leigh Kamping-Carder
Call it the mortgage merry-go-round: Parents refinance their home to fund the full cost of their son or daughter’s desired home. This allows the child to compete as a desirable all-cash buyer in an area where bidding wars are common. Then, when the purchase closes, the child refinances the new home and pays the parents back.
Sellers often prefer cash because transactions can close quickly without making a deal contingent on financing. This is particularly important in bidding wars: If the purchase price is above the list price and appraised value, it may be tricky to get a loan, said Kas Divband, a Washington, D.C., agent with Redfin. Mr. Divband said he has worked on six deals where the buyer was relying on a parent’s mortgage to make an all-cash offer.
The strategy is also evidence of how difficult it is for millennials getting into the housing market for starter homes, where competition is the fiercest. Even those with high-paying jobs and hefty down payments are losing out, particularly in cities with strong job markets for young people, such as Washington, Boston and Seattle, said Nela Richardson, Redfin’s chief economist.
Redfin agent Cody Coffman recently worked with a 20-something Olympic athlete who paid $2.8 million for his first home, a newly built five-bedroom house in Los Angeles’s Venice neighborhood that was listed for $2.758 million. His parents took out a home-equity line of credit, or HELOC, to give him the full purchase price, allowing him to beat out four other offers. “
“Educating him on how to talk to his parents was probably the most difficult part,” Mr. Coffman said, since it wasn’t every day their son asked for $2 million. The athlete worked with a loan officer who vetted him before the purchase and also handled his parent’s line of credit.
To be sure, this move will not work for everyone. Parents must have enough equity in their homes to make a refinance worth it, and the same goes for the child’s new home. Both parties must be willing to take on the added hassle and cost of two loans. And mixing family and money is often fraught, especially when large sums—and people’s homes—are involved.
Here are a few more things to keep in mind:
Loan options
Parents have several options for using the equity in their homes, including a cash-out refinance, which allows borrowers to refinance an existing mortgage plus an additional amount and take the difference out in cash; a home-equity loan, which is a loan against the value of a home, including a second mortgage; or a HELOC, which works like a credit card, allowing homeowners to qualify ahead of time and withdraw funds when the child is ready to close.
Finance fail
The biggest risk is that children will not qualify for a loan—or as big a loan as expected—especially if they pay above the asking price or the market cools. To help avoid this outcome, let the lender know your plans ahead of time, Mr. Divband said. It may be more convenient to use one loan officer for both transactions.
Note that some lenders want buyers to live in a home for three to six months before refinancing. An alternative is a delayed-financing mortgage, which allows a buyer to purchase the home in cash and refinance the day after closing for up to 80% of the value of the home, said Peter Lucia, a production manager at Brecksville, Ohio-based CrossCountry Mortgage.
Think like a lender
Parents should do the same kind of due diligence as a lender, including vetting children’s finances. Tim Manni, a mortgage expert with NerdWallet, a San Francisco-based personal-finance company, recommends working with a lawyer to draw up a family loan agreement setting out repayment terms and other stipulations. For example, parents may want to ask for 5% of the eventual sale price. Buyers may also want to get a home inspection.
Consider the costs
A purchase mortgage or a refinance would typically cost about 2% of the loan value, Mr. Lucia said. Most closing costs would apply to two loans instead of one. Luckily, prepayment penalties are rare on primary-residence loans, though they might apply on investment properties, Mr. Lucia said.
Tax tips
Gifts of more than $14,000 per person per year are subject to federal gift taxes for the giver, which could apply to both parents and children. Both parties should consult a tax professional.
Millennials’ New Weapon in Bidding Wars: A Parent’s Home Equity
