Increasingly adult children are helping their parents with housing needs because they want to or are forced to. There are many emotional, family, and lifestyle aspects to these issues. However, in most cases the number one issue to be dealt with is financial. The questions that come up are numerous:
- Should the house be sold, and parents rent?
- Can the house be sold, and parents buy more suitable housing?
- If parents’ income is insufficient or the parents are on a fixed income, how can the purchase of a new home, or necessary improvements to an existing home, be financed to allow the parent to remain in the home if the required funds are not readily available?
- Can parents afford monthly mortgage payments on their own?
- Is a Reverse mortgage appropriate?
- What will happen to the house when the parents no longer can or want to live there?
The list above is not all-inclusive but highlights many of the issues and questions that arise.
We are going to specifically talk about item number three above, and a unique program offered by both Fannie Mae and Freddie Mac that can allow an adult child to assist their parents, make a good investment and provide peace of mind.
The program allows for an adult child to purchase a home or refinance a home (and possibly get cash out) for their parents, who will live in the house, and have the transaction be treated as a primary residence even though the adult child will not live in the house. The benefits are numerous:
- A lot of times the parents cannot qualify for a mortgage because they are retired, or their income is otherwise insufficient.
- As a primary residence the down payment required is much less than what is required on a house that is not occupied by the borrower. 5% down payment for a primary residence versus 20% down payment for an investment property.
- The interest rates will be lower as a primary residence.
- There are significant advantages if buying a condo for a house to be considered a primary residence versus an investment property.
Under this program the parents may be on the loan and the title to the property, but they are not required to be. Not being on the loan or the title can provide significant estate planning benefits and save time and money later. At that same time, the opportunity for the adult child to make a sound investment while also assisting their parents is very compelling.
Also, it is noteworthy that the same program is available for a parent who wants to purchase or refinance a home that will be occupied by a physically handicapped or disabled child.
For more information on this great program please contact us.