According to an article in the Wall Street Journal, the number of parents who are contributing in some way to their children’s purchase of a home is increasing. Although these situations have existed for years, “the share of 25-34-year-old first-time home buyers with a co-borrower 55 or older rose to 2.5% in the first quarter of 2023, up from 0.6% in 2000.”
When down payments to purchase a home are paid by someone other than the buyer, or if the non-buyer is purchasing the home, use caution if you are the closing or escrow agent. Three situations, in particular, can cause problems: canceled contracts, homestead issues, and lender knowledge and approval.
When a purchase contract is canceled or terminated for some reason, there is always the question of to whom the earnest money deposit or down payment deposit should be paid. The typical contract designates either the seller or buyer receives the deposit.
However, when a third-party transfers money to the escrow / trust account holder for the transaction, the person responsible for the deposit’s return should be very careful that the contract reflects exactly who should receive the deposit if the contract is canceled. Ask: is there a separate agreement between the parents and child? Who should be notified? Etc. Be sure that your canceled contract process includes the ‘what if’ scenario of a third-party being involved.
The second big issue, and this may differ depending upon your location, is who is to be the beneficiary of the homestead protections and tax benefits? If a parent purchases a home for someone else to live in it, who receives the homestead benefits? Probably the purchaser, but it’s best to check with your local authorities. And what if the parent and child are both going to be grantees? Be careful that you know the situation, and be ready for questions.
Third, the lender knowledge and approval issue is very common, but many purchasers do not think about it. In many mortgages, there is a provision stating that the borrower will reside in the home. Hmm. . . what if the borrower is the parent and the person living in the home is the child? Be sure that the lender is aware of the discrepancy between the borrower and resident. Some lenders will modify the language of the mortgage or provide other documentation approving the split. Some may not!