More parents finance their kids' mortgages
— -- In 1991, Dan Driscoll of Towson, Md., and his wife, Theresa, wanted to buy a house, but the lowest mortgage rate they could find was 9%. Meanwhile, Driscoll's parents, who were retired, were earning 3% on their savings. At Driscoll's suggestion, his parents financed his $75,000 mortgage at a 6% rate.
Now, Driscoll has taken on a different role. Earlier this year, Driscoll's son Dan, 31, expressed interest in buying a larger home in his father's neighborhood. Instead of paying 4.5% for a traditional mortgage, Dan borrowed the money from his father at a 4.25% rate. The arrangement also enabled Dan to avoid paying closing costs, appraisal fees and other expenses charged by a traditional lender, Driscoll says.
Family mortgages work, Driscoll says, "if your children are honest, trustworthy and responsible."
If financing a family mortgage was a savvy strategy in 1991, the logic is even more compelling now. Returns from the types of low-risk investments favored by retirees are tiny: The average rate on a one-year certificate of deposit is 0.4%. Mortgage rates also are at record lows, but tight lending standards have made it impossible for many young home buyers to take advantage of them.
For Baby Boomers who are unwilling to risk their money in the stock market, financing a child's mortgage "is an opportunity to create a win-win," says Timothy Burke, chief executive of National Family Mortgage, a company that sets up and services intrafamily loans.
To date, National Family Mortgage has helped families finance more than $12 million in loans, ranging from an $18,500 down payment to a $1.17 million refinancing.
Jie Jiang, 33, and his wife, Natalie Leong, learned how tough the lending market has become when they applied for a loan to buy a condo in Los Angeles.
Leong recently graduated from medical school and has started her medical residency at UCLA, while Jiang is pursuing a post-doctoral fellowship in biomedical engineering. The couple had enough money for a 20% down payment but were rejected for a loan, Jiang says.
"Before the financial crisis, (banks) were giving everybody a loan," Jiang says. "Now, unless you have a 9-to-5 job, they won't bother with you."
One bank officer suggested that they get one of their parents to co-sign the loan, but that would have resulted in a mortgage rate of 5% to 5.25%, Jiang says. So instead of co-signing, Leong's father offered to finance the loan. With help from National Family Mortgage, they set up a 30-year mortgage with a 3.85% interest rate. The couple moved into their condo in August. Based on their expected future income, they plan to pay off the loan in 10 years.
Burke says intrafamily loans have enabled some of his customers to make all-cash offers, an important advantage in the increasingly competitive market for foreclosed properties. "They were getting beaten to the punch by other cash buyers," he says.
Banks need to get approval from several parties before selling a home in foreclosure, and a cash offer makes the process much easier, he says. In addition, they don't have to worry about whether the buyer will qualify for a mortgage, says Erin Lantz, director of Zillow Mortgage Marketplace, an online mortgage-shopping site.
When 'gifts' are loans
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