If you have a client whose parents are helping them purchase a home, there’s a variety of ways that you can lend assistance. Use your expertise to give your clients and their parents a better understanding of the complexities involved in the transaction. When another party is involved in a home’s purchase, things can get complicated quickly. Your role is to act as a resource for your clients and their parents so that they can purchase a home in the most cost efficient way.
Put It In Writing
If your clients’ parents can assist them with a down payment for the home, have the lawyers draft up a loan agreement. When clients are lent money for all or part of the home’s down payment, there should be a plan for the schedule of payments. While the parents will likely never intend to take legal action against your clients if they fail to repay them, establishing legal documents will keep things clear in the event that things go wrong. For example, if the parents die, their other children won’t be able to consider the money to be a gift to your clients, and it won’t be subtracted from their inheritance.
Putting the gift or loan in writing also offers protection in the event that the parents are audited by the IRS. Establishing a legal document for the loan will also function as a prevention for future arguments. Simply put, it clears the air and leaves nothing open to interpretation.
Press For As Large A Loan As Possible
If the parents can provide a complete 20 percent down payment, the clients will likely be able to obtain the optimal rate on their home loan. This way, they won’t have to pay private mortgage insurance orPMI. If their parents can’t provide the entire 20 percent, try to persuade your clients to procure enough assistance for an 80-10-10 loan. In this situation, the borrowers pay a 10 percent down payment while a bank provides an 80 percent loan. The borrower takes a loan of another 10 percent to round out the financing. If you can convince your clients to obtain a second 10 percent from their parents, it will save your clients plenty of money down the road.
Advise on Tax Penalties
If your the parents are considering giving your clients large sums of money for the house, advise them on tax penalties. Gifts over $13,000 a year come with an extremely high 35 percent tax rate. If your clients are married and the gifts for the home purchase are made by both parents, up to $52,000 can be given before this egregious gift tax is applied. The law states that $13,000 can be gifted from each parent to your clients as well as their spouse. This process is a convenient way for the parents to give away some of their estate at a low tax rate before death.
The Co-Signing Option
Make it clear to your clients that their parents can co-sign on the home’s mortgage. Certain loans like the VA home loans come with occupancy restrictions, yet, there are options out there for co-signing parents who won’t actually live in the home. Co-signing on the home loan will allow your clients to obtain a significantly reduced interest rate, or it might even open the door for a loan that which they otherwise wouldn’t have been qualified. Co-signing carries a significant risk, but it might be worth it. A default on the loan by your clients could harm their parents’ credit for years. This is a viable option for parents who need to hold onto their money for retirement and those who can’t afford to lend any money in the first place.
These are just some examples on how to help clients whose parents are helping them purchase a home. Perhaps, you could think of other creative ways to help your clients.