Mortgage

The way to purchase a house together with your mother and father or an grownup baby in 2021

Are you planning to buy a home with a family member?

Buying a home with your parent or adult child can be a great way to make caregiving easier, support young children, or simply bring loved ones closer together. And it can make home ownership significantly cheaper.

But buying a house can also be a bit more complicated.

Here's what you should know about buying, financing, and managing a multigenerational home to make your transition as smooth as possible.

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Multi-generation houses are on the rise

Multi-generation living is becoming increasingly popular, especially since the COVID-19 pandemic.

In fact, Than Merrill, Founder and CEO of FortuneBuilders.com says that living with an extended family "is more common today than it has ever been in history."

Merrill cites several reasons for the increase in multigenerational housing in the United States.

"It is directly related to the appreciation of the past decade in the United States," he notes. "Our ongoing shortage of inventory and the pent-up demand for housing have essentially increased prices so much that alternative measures have to be taken not only to find a home but also to be able to afford one."

Merrill advises that choosing to buy a home with your parent or child can help offset the cost of the purchase, as well as the running costs of owning a home.

But whether you are buying a home with one parent or child for financial reasons, or just want to enjoy each other's company, it is important to know what matters.

There are different ways of buying a multigenerational house, the right one for you depends on your financial situation. Here's what you should know.

5 ways to buy a multigenerational home

There are four main strategies that can help you purchase a home with a family member:

1. Buy with cash

If you have the money and want to own your home right away, this is the simplest strategy. One or more involved parties can pool their funds and buy under one or more names.

"All this requires is that all buyers transfer their agreed funds, including the purchase price and closing costs, to the trust company before the escrow account expires," said Colin Robertson, a broker at Coldwell Banker Realty.

“This can be the best option when income is an issue. However, it can be challenging to have enough cash to buy what the buyer is looking for in a multigenerational home. "

Cash buying can be easier if the parent, child, or both parties currently own their own home. The proceeds from the sale of an existing property can be used for the cash purchase of the new home.

2. Buy as a co-borrower

Buying as a co-borrower means more than one person is listed on the mortgage application. The creditworthiness, income, and assets of an individual listed on the application can be used to qualify for the home loan.

There are two types of co-borrowers:

A co-debtor of an inmate buys the house with you and lives in the property as your main residenceA non-resident co-borrower will not live in the property but will assist you in qualifying and purchasing the property

In the case of a multigenerational house, the parent and child would both be roommates.

This option would require all parties to work with the mortgage lender and (for each co-borrower):

Income and employment informationBank and annual financial statementsCredit historiesInformation about financial liabilities

“Co-borrowing is best for a family with multiple sources of income. Together, they can qualify for more and potentially buy a bigger, better home, ”adds Robertson.

Note that a co-borrower is required by law to repay the loan if another co-borrower is in default. So anyone applying for the mortgage should feel comfortable being held responsible for the mortgage payments.

In addition, all co-debtors are considered to be co-owners and participate in all equity gains.

3. Purchase with a co-signer

Similar to co-borrowing, co-signing can help a multigenerational household qualify for a mortgage.

"Those who co-sign, however, have no rights to the property itself, but are responsible for paying if others cannot pay on the title," warns Erica Stewart, founder and CEO of Fashion Fair House Interior Design Development & Investment Firm.

Like a co-borrower, a co-signer is required by law to repay the loan if the main borrower is behind with monthly payments.

However, a co-signer is not expected to make loan payments. They act as a surety for the loan without taking any ownership.

In addition, unlike a co-tenant, a co-signer will not live in the apartment. Because of this, many end up taking out a mortgage with their parents.

Despite these caveats, having multiple family members sign a loan together can result in better underwriting.

"With the right credentials, many co-signers can create a better (mortgage rate) and maybe even a bigger home for everyone at the same time," says Merrill.

4. Have a family member provide donations

What if you want to buy with a parent or child but don't want both parties to the mortgage application?

In this case, a gift of money might be the right answer. Giving cash can help your family member qualify for a major home loan without the legal obligation on the parent and child to take out the mortgage.

Monetary gifts can be provided by a family member or partner and can be used to pay the down payment, closing costs, or financial reserves required to apply for a mortgage.

Most lenders allow you to accept gift credits from a domestic partner, a partner you are engaged to, a spouse, child, parent, grandparent, or sibling. However, lenders have strict requirements and restrictions on gift funds.

"If allowed, this option is particularly useful for the younger generation who didn't have the time or income to save up for the down payment," says Robertson.

"An older family member may be able to help with the purchase while remaining free of ownership."

5. Use a gift of equity

An equity gift is different from a down payment gift. This is a transaction in which one family member sells their current home to another family member.

For example, suppose an adult child wants to buy their parents' house. The parents can agree on a purchase price below the market value of the house. Then your “additional” home equity – the amount that is not covered by the purchase price – can serve as a down payment for the child.

Find out more about donating capital here.

Loan options when buying a home with parents or children

When buying a home with parents or an adult child, you can take advantage of various mortgage loans. Some of the best options are:

Fannie Mae HomeReady Loan – The HomeReady Loan is ideal for low income borrowers. “These are for first-time home buyers whose creditworthiness is at least 620 for fixed rates and 640 for variable rates. Fannie Mae HomeReady loans allow you to add extra income from roommates to the approval and cover 3% of closing costs for those who have not bought a home in the last three years, ”explains StewartCompliant Loans – If income eligibility and down payment are not an issue, a standards-compliant loan will likely offer the best interest rate and terms on your home purchase. Buyers with at least 20% off do not need to pay for private mortgage insurance (PMI) and loan terms are flexibleFHA loans – The FHA allows down payments as low as 3.5% with a credit score of 580 or higher. "The FHA also allows borrowers to buy houses of up to four units as long as the borrower plans to live in at least one of the units," says Stewart. This could be an affordable option for buying an apartment building where parents and adult children can have their own residential units and still be in close proximity USDA loan – If you are looking to buy in a rural area or small town, you may be able to get a USDA home loan with no deductions. Usually a credit rating of 640 or more is required and only a single family home can be purchased VA home loan – If at least one family member is a Veteran, Active Service Member, or Surviving Spouse, you may be eligible for a VA loan with no deductions

The right type of loan depends on which family members are applying for the loan, how strong their personal finances are, how much money they want to put aside, and other factors.

Your loan officer can help you thoroughly compare mortgage options and find the right financing strategy for your situation.

Talk to a Lender About Your Home Buying Options (July 9, 2021)

How to choose a multigenerational house

Before making a decision to purchase a multigenerational home, it is worthwhile to thoroughly evaluate the amenities and features that all parties need and want.

“Multigenerational homes often require more square feet to accommodate the number of people under one roof,” says Merrill.

"It's important to have large common areas in a house where everyone can gather, but it's also important to give people their own space."

Bruce Ailion, a real estate attorney and broker, says that many multigenerational homes these days have properties that are uniquely suited to accommodate residents with diverse needs. He says these features can include:

More than a kitchenMore than a living areaMultiple levelsAdditional bathroomsTwo master suitesSeparate entrances

“Occasionally,” says Ailion, “I will work with a multigenerational buyer who is building a new home and adding these features to their home in a targeted manner. Others are looking for a house with a daylight basement that is suitable as space for another family unit. "

Finally, think about future needs. For example, if you anticipate that your family will grow or shrink in the years to come, consider how much space will be needed later.

Make sure you work closely with your real estate agent to find a home that will meet the needs of your entire family.

What you should consider when buying a house with your parents or your child

Many things have to be discussed openly before deciding on a multi-generational house purchase and type of living. Ask yourself:

Is it a long-term or temporary arrangement? Whose name (s) will be listed in the title of the house? Who will be responsible for mortgage payments (including property taxes and home insurance)? Who will pay for maintenance and servicing? Whose credit and income will be used to qualify for a home loan? Will the home be split equally? How is the space in the house used and shared? Who is responsible for which housework and housekeeping tasks? Want to move out of the party or sell your stake?

“The most important considerations to make are purchasing and ownership responsibilities. The most important legal aspect is agreeing who owns the house and how it will be passed on, ”says Robertson.

“From there, you can determine how payments, equity, and home use are split,” he continues.

"Working together and being on one side with common goals and needs can decide whether buying a multigenerational house works or causes problems within the family."

Planning ahead is critical

Jonathan Cohen, attorney at Cohen & Winters agrees that it is wise to consider estate planning issues long before deciding on a multigenerational home.

"Before signing or buying the home, I recommend speaking with an experienced estate planning attorney who can help anyone navigate this potentially confusing and complex situation and reduce the risk of complications later," recommends Cohen.

"In the best case scenario, all parties can agree on the terms and conditions before purchasing."

When it comes to the title, the easiest way to buy a multigenerational home is to have a person or couple on the title.

“But it really is up to the family and depends on their unique situation. If a family has the assets and decides to buy a home with cash, for example, they will likely need a written agreement stating how much each party will contribute and their name on the cover, ”says Stewart.

Your next steps

In today's highly competitive real estate market, buying a home with a parent or child can give you an advantage. It could increase your creditworthiness or your mortgage qualifying income. And it could help you afford a bigger, nicer home.

However, buying a home with multiple parties is complicated. So you should approach this decision carefully.

Make sure all family members are on the same page about property, responsibilities, and housing costs. And find the right mortgage loan product for your needs.

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