Owning a home is a dream that is shared by millions and millions of Americans. Several years ago, the national home ownership rate reached a record high as almost 70% of all families owned their own home. This number has fallen somewhat since the recession, however the dream of obtaining home ownership has remained a goal for many who are presently renting. More recently, more Americans have been able to reach their goal of home ownership because of low interest rates that have made owning more affordable than ever.
The biggest obstacle to purchasing a home is coming up with the down payment. Fortunately, there are programs which allow a down payment from 0% to 5% of the sales price, such as VA, FHA and Fannie Mae and Freddie Mac programs. Yet, even with these low-down payment alternatives, many first time home buyers need help when purchasing their first home.
When you are preparing to purchase a home, it makes sense to consider traditional sources of aid such as our families. Traditionally, American parents have been a significant source of help when their children decide to become part of the community of homeowners. Here are a few important ways in which parents can help their children purchase real estate:
Alleviating cash shortages through gifts. We have already mentioned that the number one obstacle to owning a home is a shortage of cash. Many of the mortgage programs that require small down payments in order to purchase a home also allow some or all of the liquid assets needed for the down payment and/or closing costs to be provided through a gift from an immediate relative such as one’s parents. These programs include FHA and VA, as well as conventional programs.
For example, FHA is a very popular program for first-time buyers and it allows all of the capital necessary for the purchase to come from a gift. The capital required is typically 3.5% of the sales price for the down payment and any closing costs not paid by the seller or through a lender credit.
VA loans are for the benefit of active military and veterans of military service. The majority of VA loans require no down payment and therefore the use of gifts would typically be for those who need help with closing costs, especially when sellers are not contributing towards such costs or a lender credit is not available.
Historically, conventional programs have tended to be less liberal with regard to the use of gifts, but conventional guidelines have been liberalized more recently, especially with regard to guidelines for low-to-moderate income purchasers. In some cases, conventional programs require at least 3.0% to 5.0% of the cash needed for purchase to come from the purchaser, unless the gift constitutes 20% of the total purchase price of the home. Other conventional programs allow gifts for 100% of the required down payment with minimum down.
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