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!
Hi Barbara!
What a timely article! We are working through this scenario in my family in two ways. My mother is helping my daughter and her family qualify for a mortgage on their first home. They were approved for a new construction purchase, and the week before closing, she was notified by the lender, who had pre-approved them and was preparing for closing, that because her husband was an area manager for a legal cannabis dispensary, his income was not allowed. They had this information for two months ahead of closing. They needed a co-signor and will be closing in two weeks, with her grandmother as a non-occupying co-borrower.
We are also selling our home to parents who are buying the home for their daughter and husband, a new teacher who will be starting his first teaching job in the fall. The lender could not use his income because there was no history of him teaching. The parents are paying cash, and the kids will be paying them back privately.
The information you provided is very useful and will be passed along to all of the parties involved. This is of particular importance to my daughter and mom to ensure the homestead does not affect mom’s current residence or affect the terms of the mortgage, which could cause future issues with a non-occupying co-borrower.
Hi, Cindi,
I am so glad that the information was timely and helpful to you! The lender that delayed approval because of a borrower’s income, even though they knew about it months before, sounds like a process delay. Annoying, definitely, and potentially deal-breaking, but fortunately the borrowers had an alternative. “Non-occupying co-borrower” is a very useful phrase.
Interesting that your sale is to similarly-situated buyers.
I hope that both sales involve a great title insurance agent/insurer! ☺️
NOTE: For those parents who are paying cash and being paid back by the borrowers – to avoid the Unlicensed Practice of Law, if the “closing” entity does not represent your buyers, legally, it will not be able to create the ‘pay-back’ document.
Your examples provide good information for other buyers, sellers, and borrowers.
Thank you for your reply!