Buying a home isn’t a piece of cake. It can be hard, especially for a first-time buyer. There is a lot to navigate, like getting pre-approved and saving for a down payment. Having family members who are prepared to help is a great plus! We will discuss various ways a buyer’s family can help by improving credit, co-signing, or gifting funds or equity for a down payment.
Improving Credit
Oftentimes first-time buyers have very little to no credit history. Many things make up a credit score, and you will need a minimum score of 620 in order to qualify for a mortgage. It is important to note that different mortgage types will require different scores. There are ways to help someone build credit responsibly. If you have family that doesn’t have a credit history or has a low score, here are some options for how you can help.
Authorized user. One easy thing you can do is add a child as an authorized user to your account. Your credit card needs to have a healthy balance-to-limit ratio (less than 30% of total usage). If you add an authorized user, make sure to use a good account, one in good standing with no late payments and a low balance. When you add an authorized user, they will get a card issued to them, so make sure that’s understood and what the use rules are.
Secured Credit Card: Both Capital One and Discover have good, secured credit card programs. Unlike traditional credit cards, a secured credit card requires a security deposit, which serves as collateral for the account. The deposit typically matches the credit limit, so if you put down $500, your credit limit will be $500. This deposit minimizes the risk for the card issuer, making it easier for those with poor or no credit history to be approved. As you use the secured card responsibly—by making on-time payments and keeping your balance low—your credit score can improve, potentially allowing you to qualify for an unsecured credit card in the future. Amazingly, we’ve gotten people a score in just over 30 days.
The above tactics will also help a person improve a credit score that may be too low to qualify for a mortgage. While having the minimum credit score needed might help you qualify for a loan, there are differences in the rates you will get on your loan based on your score. It’s best to do all you can to improve your score as much as possible before applying for a loan.
Co-Signing
Co-signing on a mortgage involves a third party, usually a family member or close friend, agreeing to take on financial responsibility for the loan if the primary borrower fails to make payments. The co-signer’s credit and income are considered by the lender, which can help the primary borrower qualify for the mortgage or secure a better interest rate. However, co-signing is a significant commitment, as the co-signer is legally obligated to cover the debt if the borrower defaults, and this liability can affect the co-signer’s credit score and financial situation.
If a child needs help to meet the debt-to-income (DTI) or credit score requirements to qualify for a mortgage, you can consider co-signing for them. As their parent, you would be a nonowner occupant co-borrower. Once the child is established and making enough money to qualify, they would refinance on their own, relieving the parents of the obligation.
One common situation in which we see non-owner occupants is when someone has a new job and doesn’t have enough time on the job to use their income to qualify. This might happen with a recent graduate, though often, time spent in college can be considered part of employment history. Another common situation would be someone who is self-employed and is just getting their business off the ground.
Gifting Funds
Gifting funds is pretty much what it sounds like. The buyers may not have the funds necessary for a down payment on a home. While different loans have different downpayment requirements, some loans may require little to zero down. There are many federal programs to help with down payment funds. Missouri, Kansas, and Illinois all have down payment assistance programs. Some gifts might be given to simply help in situations where the borrower does not have the 20% to put down on the loan in order to avoid the need for mortgage insurance.
Parents can gift funds for a down payment. There is a minimal but necessary documentation standard for underwriting gift funds. There are also some tax implications to be considered when gifting funds for a home purchase. Cash gifts from a wedding can also be used for a down payment. You can learn more about what information you’ll need in order to document these funds here.
Gift of Equity
A gift of equity purchase occurs when a homeowner sells their property to a relative at a price below market value, with the difference being considered a “gift of equity.” This gift acts as a down payment, reducing or eliminating the need for the buyer to provide additional funds upfront. It can also help the buyer avoid private mortgage insurance (PMI) and qualify for better mortgage terms. The gift must be properly documented, and there may be tax implications for the seller, as the IRS has specific rules regarding the amount of equity that can be gifted without triggering gift taxes.
Buying a home, especially for the first time, can be a challenging process, but having family support can make it more manageable. Whether it’s help improving credit, co-signing a mortgage, or providing financial assistance through gifts or equity, there are various ways family members can help each other achieve homeownership. By understanding and utilizing these options, families can work together to overcome financial hurdles, ultimately making the dream of owning a home a reality. With proper planning, communication, and adherence to legal and tax guidelines, these strategies can pave the way for a smoother, more successful home-buying experience. Reach out to one of our loan advisors today to get started.