60% of First-Time Home Buyers Said to Rely on Family Help

Tony and Judy Pribyl both hold down good jobs, but like many young couples they had trouble saving enough money for a down payment on their first home. The Pribyls decided to finally take Judy’s parents up on their offer to give them the money needed to make a down payment. About a month ago, the Pribyls and their 4-year-old daughter moved into a residence they purchased for $176,000 in Ventura. Tony and Judy were able to get a loan from Home Savings of America with just 5% down--and all of that came from Judy’s parents.

More than 60% of first-time home buyers get some sort of help from their parents or grandparents, estimated Patti Kaiser, vice president and district sales manager at California Federal Bank’s Reseda loan office. Without family assistance, she said, many first-time buyers wouldn’t be buying at all. Help from family generally comes in the form of a gift of funds toward a down payment or help in securing a loan with a co-signature.

Family members who make a gift of funds for a down payment will generally be required by a lender to sign a gift letter stating that they don’t expect the money back. Lenders don’t want customers who are also borrowing their down payment. Lenders also generally require that part of the down payment come from the borrower’s own savings (the Home Savings of America program is an exception). Most loans with a 5% down payment, for example, will generally require that three-fifths of that down payment come from borrower savings. The rest can be a gift.

Lenders prefer that most or all of a down payment come from the borrower. Lenders look for so-called seasoned funds, explained Ann Carlton Bose, president both of Estate Funding Inc. in Woodland Hills and the California Assn. of Mortgage Brokers’ L.A. County chapter. If the down payment money has been in the borrower’s account for three months prior to the loan, then it is considered seasoned. Individuals can make annual gifts of $10,000 to as many people as they want without triggering any gift tax consequences. Some borrowers avoid telling lenders that any of their down payment was a gift by simply getting any gift money from their family at least 90 days before applying for a loan. This also is a way for family members to circumvent lender requirements that they sign a gift letter.

Lenders don’t like being fooled, of course. Some lenders may ask where the down payment really came from if they see that the borrower’s tax returns don’t reflect any significant interest or dividend income. Sometimes, lenders will ask for up to one year’s worth of bank statements to be sure that the down payment wasn’t all a gift, but that’s pretty rare, say local lenders.

Another way that parents, grandparents or your rich uncle can help you buy a house is by co-signing on a loan. Even with a co-signer, most lenders will require that the person planning to occupy the dwelling qualify for at least half the mortgage payment on their own, said Bose. If all the loan signers will be living under one roof, though, lenders will just total up all the assets and income of the would-be borrowers, she said.

Parents are often reluctant to co-sign on a loan for their children, Bose said. That’s because parents don’t want to find their credit hurt if their children make late mortgage payments or don’t pay at all. Also, lenders will almost never remove the name of a co-signer from a loan without refinancing. Some children don’t want their parents as co-signers because that means the parents are co-owners and their names will appear on the loan and on the deed of trust.

There are a very few generous and well-healed parents and grandparents who buy a house outright for their children. If the children make monthly payments to the parents, that income has to be reported by the parents to the IRS and the state Franchise Tax Board. The parents can also expect to pay a higher rate of interest on a loan they take out for a home that they aren’t personally occupying. Finally, buying a home for the children won’t help build their credit history.

A gift of money for a down payment remains the most popular way for family members to help each other out when it comes time to buy a home. Many buyers are getting help from family, said Clifford Collins, national director of sales for Home Savings of America in Irwindale. It used to be that only first-time buyers solicited help from family members. Now, he said, many move-up buyers are doing the same because all the equity in the first or second home has been erased by tumbling real estate prices.

While Home Savings does offer a 5% down “Easy Start” loan where all the money can come from family, the borrower must have very good credit. Home Savings additionally requires the borrower to have a reserve of at least two months worth of PITI--principal, interest, taxes and insurance. It should also be noted that all of Home Savings’ other loans require borrowers to ostensibly come up with some of their own money for a down payment.

Buyers can employ all sorts of strategies when they don’t have much money for a down payment and when parents can’t or won’t help.

Veterans can qualify for Veterans Administration-backed loans of up to about $184,000 with basically no down payment at all. A certificate of eligibility from the VA is required.

The federal Fannie Mae has programs available that allow a borrower to put 3% down and get a loan of up to $203,150. Another 2% of the down payment can come from family. Even the lender can kick in the needed 2% by charging a higher interest rate over the course of the loan and essentially refunding 2% of the purchase price to the borrower for part of the down payment.

Buyers can also shop for developers who are offering special low- or no-down payment programs, or sellers who no longer have equity in their homes and need to sell. Take, for example, a house purchased in 1990 for $200,000 with a $160,000 loan. In the latter case, a savvy buyer might offer to just take over the owner’s payments. While most residential loans have what’s known as a “due on sale” clause, many lenders are happy to have anyone in the home who can pay the mortgage.

The buyer and seller can create an AITD--all-inclusive trust deed--whereby the seller still remains officially responsible for the original loan. These AITDs, also known as wrap-around loans, can run afoul with some lenders who do insist at some point in enforcing the due on sale clause which requires borrowers to pay off a loan when the property is sold. Some sellers are also wary of just letting a buyer take over payments when the seller still remains liable for a default by the buyer.

Some buyers unfortunately resort to less than scrupulous tactics to get a low-down loan. These buyers inflate the sales price of a home while striking a secret deal with the seller to take back a second mortgage. A $160,000 sale might be represented to the lender as a $200,000 deal. The lender then makes a $160,000 loan with a $40,000 down payment. The only problem is that the $40,000 is coming from an under-the-table loan made by the seller. This type of deal is neither ethical nor legal. Buyers can, however, get sellers to raise the price of a home and then pay for all non-recurring closing costs. This helps buyers get a slightly bigger loan and pay for up-front costs over the term of the loan.