September 21, 2000

Helping the kids buy that 1st house

When you are just one of seven, you get in line for hand-me-downs and hamburgers.

My folks provided us with a terrific environment to grow and experience, yet the reality of providing help with the down payment for a home was simply out of the question.

There are several ways for today's parents to help their children with the down payment on a home - some of them taboo just a few short years ago. One of them, a "Pledge Asset Loan" offered by many local portfolio lenders can really be viewed as hand-me-down home loan. However, unlike clothing and toys, this hand-me-down will show no signs of wear and tear. And, it requires very little cash spent at closing.

   Here's how it works: Any relative can "lend" another relative a down payment in the form of a certificate of deposit. For example, a parent pledges an amount equal to a 20 percent down payment (this sum can be in the form of a CD, cash or a combination) to a child and that amount becomes the entire down payment for the child's first home. The CD is considered "pledged" cash. It earns interest but cannot be spent until the value of the home increases to 125 percent of its present value. (The increase could be either appraised/market value or equity buildup.)

When the home's value reaches the 125 percent of its original value, the CD is returned to the parents with interest, perhaps for the possible use of the next child in line. This way, the parents don't have to blow their entire nest egg on the first kid ("to get him started") and gamble on the potential repayment.

"A great part of the program is that the grandparents also are eligible," said Glenn Wells, director of residential lending for First Mutual Bank, which labels its program the First Start Program. "In some cases, the grandparents are in a better position to help a grandchild than the parents."

The First Mutual loan comes with an adjustable-rate mortgage of one or three years. The package can be for 100 percent of the home's value with a loan origination fee of 1 percent. However, the owner-occupant (child) must be able to qualify for the loan amount.

Family members have accomplished the same "pledged" loan through a variety of plans. One is to pledge stocks (borrow against the asset) and give the borrowed money to the child as the down payment for a home. This way, appreciating stocks do not have to be liquidated nor potential capital gains tax paid because the stock is not cashed.

The biggest challenge becomes the price of homes in many areas. A $250,000 "starter" home would mean a 20 percent down payment CD pledge of $50,000.

Even though the parent gets that sum back, with interest, actually accruing that much liquid cash is difficult.

Another way to help is for a parent to be a co-borrower on a Federal Housing Administration-insured mortgage offered by the US Department of Housing and Urban Development. This way, the child must only assume 50 percent of the debt load, providing more leeway for monthly income requirements.

"There's really no other loan out there with the relaxed loan ratios when you are considering kids and parents," said Dave Walker, a specialist in FHA loans for Windermere Services and HomeStreet Bank (formerly Continental). "I've been involved with home deals where this was the only way the child could qualify."

The Federal Housing Administration's 203K loan wraps purchase and fix-up costs into one loan. However, because investors took advantage of program and left HUD holding the bag, it is now available only to owner-occupants.

  "It used to be very easy with the 203K program, but that is no longer open to investors," Walker said. "In the parent-child relationship we are talking about, the parent would be seen as an investor under 203K. The parent can no longer buy it and have the child simply assume it."

  Under 203K, owners can do their own refurbishing but all 203K loans require a contractor bid for the job. That way, if the owner is injured or becomes ill, the lender knows there will be enough funds to finish the work.

"If we've had complaints, they've typically come from owners who are looking to save money, do the work themselves and not have a contractor involved," Walker said. "They can save money, but they can't really pay themselves. Any money saved in one phase can be directed to another phase.

If there is a surplus left over after the project is completed, it can reduce the balance the owner originally owed on the loan." Some wrinkles are new, others have been changed because of deliberate abuse by consumers. However, while lenders try to fill needed gaps with creative programs, it's up to consumers to use the programs appropriately.

Previous columns:

• Dorm option: Do you really want to play landlord?, 09-14-2000
• Location, location, schools, 09-07-2000
• Beware the predatory lenders, 08-31-2000
• Fix-up, remodel or move, 08-24-2000
• Limiting renters in condos, 08-17-2000
• New mantra: location, location and wired, 08-10-2000
• Tips on buying property in Canada, 08-03-2000
• Manufactured homes are improved and so is financing, 07-27-2000