Tackling the Homebuyer Affordability Crisis | Part 4 of 4
This final article in the series is written for parents, grandparents, and other stakeholders who want to help a first-time homebuyer achieve homeownership sooner rather than later. In many cases, support from others can play a meaningful role in overcoming affordability challenges, particularly when paired with early planning and clear expectations.
Using the same Four C’s framework introduced in this series, this article outlines how stakeholders can help position a buyer for long-term success.
Credit: Supporting Strong Credit Development
Credit remains one of the most influential factors in mortgage qualification. While many loan programs allow financing with lower credit, higher credit scores often lead to better interest rates and more favorable loan terms. Improvements typically occur in incremental ranges, meaning progress over time can still provide measurable benefits.
Stakeholders can support credit development by educating and encouraging consistent, on-time payments and responsible use of revolving accounts. In some cases, helping a younger buyer establish credit may be appropriate. This can include adding them as an authorized user on an existing account or assisting with a secured credit card that reports to the credit bureaus. These strategies should be reviewed carefully to ensure they align with the buyer’s long-term goals.
Capacity: Income Stability and Co-Borrower Options
Capacity refers to a borrower’s ability to repay a mortgage based on income and existing debts. Lenders typically look for a stable employment history, often around two years in the same job or career field, with flexibility for recent graduates working in their field of study. Buyers with variable income, such as commission, bonus, or self-employment income, generally need a documented two-year history for their income to be considered.
In some situations, a family member may choose to co-sign on a mortgage to help a first-time homebuyer qualify. This is commonly done as a non-occupant co-borrower, meaning the co-signer does not live in the home but is legally responsible for the loan alongside the buyer.
Co-signing may help strengthen a mortgage application when the buyer’s income, debt-to-income ratio, or employment history alone is not sufficient to meet lending guidelines. The co-signer’s income, assets, and credit profile are included in the loan review, which can improve overall qualification.
It’s important to understand that co-signing carries ongoing responsibility. The loan will appear on the co-signer’s credit report, and they are equally responsible for the mortgage payments if the primary borrower is unable to make them. This obligation can impact the co-signer’s ability to qualify for future credit, including their own mortgage or other loans.
Because loan program rules vary and the long-term implications can be significant, co-signing decisions should be reviewed carefully with a loan advisor to ensure all parties understand their roles and responsibilities before moving forward.
Capital: Helping with Down Payment and Closing Costs
Capital includes funds needed for the down payment, closing costs, and prepaid expenses. Many first-time buyer loan programs require down payments in the range of 3.5 percent to 5 percent, though eligibility varies.
Gifted funds are a common way parents and family members help first-time homebuyers cover down payments or closing costs. Most mortgage programs allow gifts from eligible relatives, provided the funds are properly documented and clearly identified as a gift rather than a loan.
Gift funds may come from personal savings, funds received for special occasions such as weddings or graduations, or, in some cases, from a parent who has accessed funds through a loan against their own 401(k). When a 401(k) loan is used, the funds can be gifted to the buyer, provided the transaction is documented correctly, and the parent remains responsible for repayment of the loan.
In addition to mortgage documentation, gifted funds may carry tax reporting considerations for the person giving the gift. While these considerations are separate from loan qualification, they are an important part of planning and are best reviewed with a tax professional and an experienced lender.
As with all gifted funds, lenders require a signed gift letter confirming that repayment is not expected, along with documentation showing the source of the funds and how they were transferred to the buyer. Because requirements vary by loan program, discussing gifting strategies with a loan advisor early can help avoid delays and ensure the funds are used correctly.
For buyers with time to plan, building savings over time often provides greater flexibility and competitiveness than relying on assistance programs at the time of purchase.
Collateral: Supporting Smart Property Choices
Collateral refers to the property being purchased and how it supports the loan. Lenders evaluate the condition, occupancy, and marketability of the home to ensure it meets loan program requirements.
First-time buyers often focus on owner-occupied single-family homes, condominiums, or townhomes. Some may consider two to four-unit residential properties, where the buyer lives in one unit and rents the others. While this approach can help offset housing costs, it may involve higher purchase prices and stricter qualification standards.
Many first-time buyer loan programs also require properties to meet specific safety and habitability guidelines. Helping a buyer understand these requirements early can prevent delays and limit unexpected challenges during the loan process.
Additional Ways to Provide Support
Beyond the Four C’s, stakeholders can support buyers through early planning and guidance. Helping a buyer save consistently, reviewing credit periodically, and encouraging conversations with qualified real estate and mortgage professionals can all improve outcomes. Purchasing a home is a complex process, and experienced guidance can help buyers avoid unnecessary risk and make informed decisions.