More parents helping with mortgages. A Good Thing or Dangerous Practice?

The tightened lending standards are keeping a lot of young borrowers on the sidelines in home buying today. That's where parents are stepping in.

More parents are taking on the role as mortgage lenders to help their kids take advantage of low home prices and record-low mortgage rates. In fact, one in three first-time homebuyers either received a gift or loan from their families for a home purchase made in 2011, according to National Association of Realtors' research.

But parents who enter into a gift-giver or mortgage lender role need to make sure they follow some tax guidelines.

The federal government has rules on how much you're allowed to gift. For 2012, individuals can give up to $13,000 tax free in one year without having to pay gift taxes. Married couples can give up to $26,000 a year.

Some parents are acting more as a mortgage lender. They can set up an arrangement where they charge interest on the money they lend, but the interest charged must be based on the IRS's "applicable federal rate" minimum for various loan maturities. Still, those rates are even far below today's record-low mortgage rates.

Parents will need to pay income taxes on any interest earned on the loans. However, the return may be better than what they can get for a low-interest CD or money market fund.

As for the children, they'll still be able to deduct the mortgage interest on their federal income taxes.

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February 06 2012 - South Lake Union
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My personal feeling it is a great thing for parents to help their kids buy a house. Interest rates will never be lower in their lifetime xnd in a sense, both kids and parents gain.
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February 06 2012
Profile picture for sunnyview
I think that parents who are able have helped their children buy for a long time. As long as you can afford the gift, it is great way to help your children build a strong financial base if they are ready and stable enough to be homeowners.

Parents are much better of gifting part of a down payment than doing something like co-signing for their children. Whereas I have seen good things come from a gifted down payment, I have seen only problems with co-signing for a mortgage for a grown child.
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February 06 2012
Read your question low home prices - r u kidding these are low because the Government is paying to keep rates low- wait till rates go higher
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February 14 2012
Yes for great the long term. It is same as parents helping with college tuition
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February 14 2012
It's great for the families and it helps the market. Win-win situation*
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February 17 2012
It's good!  whether or not it's sometimes dangerous practice is an individual issue.  it's good for the market, parents that can afford to do this kind of help will most likely see it through and are trying to get their kid off to a good start.  (or they are offering a bailout to an irresponsible kid)
in either case, the home is not likely to become a foreclosure and the interest rate for the parent was very likely FAR better than what the kid could get on their own- so it means long term savings.

in the past 2 years I have had several transactions that were parents helping in one way or another.  In fact one was a parent that flat out bought three houses with cash for their daughters.
2 of those daughters will very likely pay the agreed amount back to the parents until their debt to them is paid, the other will fortunately never be homeless.

rates are low- if they are financing...it's a good time as a parent to make that investment.
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February 17 2012
 
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