A growing senior population needs a little help with rising housing costs and mortgage qualification requirements. Often, social security alone is not enough to cover a house payment. So, more children find buying a home for parents is a great solution. Although, 20 – 25% down payment for buying as an investment property can be a struggle for many. Now, buying a home for parents is possible through an occupancy exception allowing…
- 5% down payment
- Primary residence rates
- Borrower does not have to live in the property
- Rental property insurance is OK
Ways to Buy a Home for Parents
When buying a home for a parent, there are several ways to accomplish this. Choosing the right mortgage depends on the scenario, finances, and goals. Sometimes, the goal is to own jointly. Conversely, only the buyer may want ownership and handle all finances. Additionally, there could be income tax strategies in play. Whichever the scenario or goal when buying a home for parents, options may include the following:
- Purchase as a rental property (known as investment property)
- Use a non-occupying co borrower
- Pay cash – Are you sure you want to pay cash?
- Buy a duplex – You live in one side, parents in the other side
- Buy a house for parents to occupy, but buyer gets primary residence terms
Buying a Rental Property for Parents to Live In
Many understand in buying as an investment property, the interest rate and down payment requirements are higher than other mortgages. But, there are reasons to purchase a home for your elderly parents as investment property. Even when rates and down payment are higher. Possible reasons include…
- Getting a tax write-off
- Using the rental income to qualify
- Keep ownership only in buyer’s name
- Parents do not qualify on their own
Buying a Home for Parents Together
Sometimes there is a reason to buy a home together with your parents. Basically, the parent is the primary borrower which will occupy the residence. Then, the children may be on the mortgage but do not have to occupy the home. In the mortgage world, this is called a non occupying co borrower. Otherwise known as a cosigner. In this case, there are several reasons to choose this option…
- Use more income to qualify
- Want to own the property jointly
- Use assets from any borrower
- Get a primary residence interest rate
- Low down payment
Both conventional loans and FHA loans allow for non occupying co borrowers. FHA allows for as little as 3.5% down payment, while Fannie Mae and Freddie Mac allow as little as 3% down payment. Both have their advantages in certain circumstances.
Pay Cash for a Home for Mom and Dad
First of all, if you are considering cash as a way to buy a home, good for you! You are obviously doing something right. Yet, paying cash in this scenario could have some drawbacks. These include potential tax consequences as well as missed potential income tax strategies. There is a balance that needs to be discussed with your CPA and/or financial adviser in order to determine if it makes sense to keep cash in place for investments while obtaining a low interest mortgage. Alternatively, one may choose to use cash and keep debts to a minimum.
Either way, it is suggested to read this article below about paying cash first. It explains the potential disadvantages of paying cash for a home.
Buying Home for Parents Guidelines
Now, here is an option most have not heard of. This is where an adult child may buy a home for their parents, child does not have to live with the parents, yet receive a primary residence type mortgage. That’s right! Buying a home for parents with 5% down payment, primary residence interest rates, and still live in your current home. Therefore, this option checks a lot of boxes.
- Being able to support parents while living in separate homes
- Low down payment
- Low interest rate compared to investment property
- May help estate planning
Fortunately, there is a guideline exception which allows this scenario to help out parents. It states that children may buy a home for parents if the parent is unable to work or does not have sufficient income to qualify for a mortgage on his/her own. In this case, the child is considered the occupying borrower. Since this is not an investment property purchase, the buyer must qualify for the mortgage on their own.
“…children may buy a home for parents if the parent is unable to work or does not have sufficient income to qualify for a mortgage on his/her own“Occupancy exception to buy parents a home
Although, qualifying for a home for mom and dad while owning your own home may be difficult, the terms make it easier to pull off.
Benefits of Buying a Home for Parents
There are many potential reasons to purchase a home for mom and dad. For the last program mentioned, the parent may not be able to work or qualify for a home alone. Although, a reverse mortgage provides seniors the ability to live in a home without paying a principal and interest mortgage payment, coming up with the significant down payment could be an issue.
Furthermore, the estate planning could be a reason that parents occupy the home but possibly not own the home. Finally, even though you love your parents, you may not want to live in the same house together. One option includes buying a home next door so they can be checked on regularly. Also, it is possible to purchase for parents that live a distance from their children.
If helping your parents live a better quality of life in a home that does not break their budget, these options provide solutions for both parent and child. Buying a home for parents could be a better option than a retirement home or a reverse mortgage. Things to think about!