By Chris Taylor
CHICAGO, April 4 (Reuters) - For young would-be homebuyers, this really is the best of times and the worst of times.
After the brutal housing bust, homes are more affordable now than they have been in more than four decades, according to the National Association of Realtors. Home prices have sunk to 2002 levels, and interest rates hover near historic lows - below 4 percent for 30-year fixed-rate loans.
The NAR says its Housing Affordability Index - which measures median salaries against home prices and mortgage rates - is at a record high, and that means this can be an ideal time to buy a first home.
On the other hand, young Americans aren’t exactly flush with cash. Almost one in five young adults is jobless, fresh college graduates now carry, on average, more than $25,000 in debt, and many starter jobs pay poorly and are hard to find.
Meanwhile, mortgage shoppers are expected to come up with more and more cash to mollify nervous lenders: Median down payments last year were around 22 percent, according to online real estate marketplace Zillow, roughly double the rate of three years earlier.
So how can first-time homebuyers cobble together the money to get a deal on a dream home? They can apply for assistance to the Bank of Mom and Dad.
That’s how newlyweds Mike and Jessica Sental landed a new home in Clifton, New Jersey, last summer. The couple was house hunting but having trouble coming up with enough for the down payment. They had about $30,000 stashed away, roughly 10 percent of the purchase price, but needed a little more to appease lenders.
That’s when Mike’s parents stepped in with $15,000 worth of help.
“They provided about a third of the down payment, with no expectation of being paid back,” says Sental, 30, an information technology analyst. He said his bankers were aware of the parental gift.
“With prices and interest rates so low, it was the perfect time,” he said. “Now, we’re paying money toward something we own instead of throwing it away on renting.”
It’s a common scenario. According to the NAR, 14 percent of all recent buyers received a gift from a friend or a relative to help with the down payment. That’s up from 9 percent five years ago.
“It’s happening pretty regularly now for a couple of reasons,” says Sandi Bragar, the San Francisco-based chief planning officer at Aspiriant, a Los Angeles wealth management firm.
“Home prices have sunk in so many areas, and interest rates on mortgages are low at the same time. You get a lot of parents wanting to help out their children. And sometimes, the other way around - grown kids wanting to do something nice for mom and dad.”
But helping the next generation into their first homes is not as easy as just writing a check. Myriad financial issues can come into play. There’s the taxman to consider. And there’s the emotional subtext: When family and finances mix, a volatile brew of pride and resentment can result, and be made worse when strings are attached to the deal.
A winning arrangement can turn into a loser when parents who really can’t afford to help do so anyway, and damage their own retirement savings.
With that in mind, helpful relatives may want to structure their intra-family assistance in different ways. Here are a few avenues to consider:
Parents who have the financial wherewithal can just hand over cash to help with the down payment. The annual maximum for tax-free gifting is $13,000 for each giver and recipient. That means that a couple could give as much as $52,000 to their son and his wife.
You can give more than that, but then you will have to fill out IRS Form 709 to report it to the Internal Revenue Service. You still won’t owe any taxes until you exceed the lifetime gift exemption, currently $5.12 million. (The traditional limit is $1 million, and without new legislation it could revert to that level.)
If you would like to see that money back eventually, you could act as a bank and lend your children the money to buy the home. If you structure the loan as a proper mortgage, the borrowers could still take the mortgage interest deduction on their taxes; in any case, the lenders would be required to declare the interest as income.
“I call it a win-win mortgage,” says Tim Burke, chief executive officer of National Family Mortgage, which helps arrange such loans between relatives. “That’s because parents are earning more than they would be in their savings account, and borrowers have access to funding at lower rates than they’d get from a bank.”
A caveat: To be recognized by the IRS as a loan and not a gift, the interest rate has to be at least as high as what’s called the “applicable federal rate,” currently 2.65 percent for a long-term loan. (You can research the going rate at the IRS website).
A company like Burke’s National Family Mortgage can help you properly document and register such a loan, so that it meets all IRS requirements.
Putting both parents and kids on the deed and mortgage is one way to deal with gift-tax concerns. The children could eventually buy out the parents’ portion, when they’re financially ready to do so.
But know that such a deal intertwines your financial futures. If the goal is for the kids to make the mortgage payments, and they fall behind, the parents’ credit record would be affected.
And it could get really ugly if all of the co-owners have strong and different opinions about the decor, or how often the lawn gets mowed.
“You have to be careful, because family is the most important thing and you don’t want to ruin any relationships,” says Teri Gault, a Santa Clarita, California, mother who helped her son buy his first home. After all, in a couple of decades, the help might be flowing in the opposite direction.