The Home Buyer's Korner

Information presented should be used for educational purposes only.

July 7th, 2015

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The Home Buyer’s Korner

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Buying a Home for Your Parents

Buying a home for your parents 2It’s not all that uncommon for parents to help their children buy a home, but sometimes it makes sense for an adult children help buy a home for their parents.

It may be that you’ve been successful and want your parents to have a better home than the one they’re in now. Perhaps their current residence no longer meets their needs or maybe they simply live too far away and it’s time to rethink your extended family living arrangements.

Basically, you have several issues to consider:

  1. Buy a home for them outright and allow them to live there.
  2. Assist them in financing a home if they’d have difficulty obtaining a loan by themselves.
  3. Finance a home and help them with the mortgage cost to make it affordable.

Coupled with these are questions about financing, title, taxes and the eventual sale or inheritance of the property, which vary among each state, so talk with a real estate agent, mortgage lender and attorney after reading the post to get more details.

If you’re planning to finance the purchase of the home yourself, you may have significant assets to draw upon or you can explore the option of financing with a traditional FHA mortgage loans as a non-occupying co-signer, which only requires a 3.5 percent down.

If your parents can’t qualify for a mortgage on their own, but can cover all or some of the mortgage payments and other expenses, you might consider taking on the role of a non-occupant co-signer. While this is more commonly associated with car loans and other smaller obligations, it can also be used on a mortgage.

When you put yourself on the loan as a co-signer, you’re accepting responsibility for ensuring that the mortgage payments are made, the same as your parents. If they can’t pay the loan one month or for an extended period of time, you’re promising to step up and cover it.

FHA views these types of purchasing differently than conventional mortgages. Unlike a conventional mortgage your lender won’t consider this home as a second home purchase or investment property, which requires large down-payments, cash reserves and often a higher interest rate.

When purchasing a home for your parents as a non-occupying home buyer you can benefit for a nice tax break. You can deduct the mortgage interest on both homes, up to a total of $1 million for the combined mortgage balances. You can deduct the property taxes on both, too. However, if you already own a second home and have mortgages on both, you can only claim the mortgage interest deduction on two of the three properties.

Another great reason to consider an FHA mortgage in this scenario is that unlike with a conventional mortgage won’t face the obstacle of a property with conventional financing needing to be at least 50 miles away from your primary residence to secure second home financing and a lower interest rate. That doesn’t work so well if your parents are moving to be close to you or if you’ll be helping to provide care.

There is an option called the Family Opportunity Mortgage, which is authorized by Fannie Mae and Freddie Mac and designed for children buying a home for an older parent who is unable to work or qualify for a mortgage on their own. It waives the 50-mile requirement and allows the loan to be qualified on terms similar to a mortgage on a primary residence, meaning a lower interest rate and a down payment of as little as 5%, rather than the 20%-25% commonly required on second homes. However, it is a niche product and it may be difficult to find a lender that offers it.

Regardless of how the home purchase is financed, there is one other major issue to consider – whose name goes on the deed. Putting the home in your parents’ names, for example, could jeopardize their eligibility for Medicaid, if they may be in need of that program. The home could also be considered a countable asset that might have to be sold to defray Medicaid nursing home expenses.

However, having the property in your parents’ names could allow you to escape capital gains tax consequences that a second home would be subjected to, should the property rise in value. However, there could still be issues related to the inheritance of the property when the time comes.

Most attorneys recommend that people buying a home for their parents place the property in a trust. That allows the parents to enjoy the use of the home and provides a mechanism for the home to pass on to the child or children with minimal complications. Laws do vary by state, however, so it’s essential to get good legal advice before pursuing this route.

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