Redfin agent Cody Coffman recently worked with a 20-something Olympic athlete who paid $2.8 million for his first home, a newly built five-bedroom house in Los Angeles’s Venice neighborhood that was listed for $2.758 million. His parents took out a home-equity line of credit, or HELOC, to give him the full purchase price, allowing him to beat out four other offers. “
“Educating him on how to talk to his parents was probably the most difficult part,” Mr. Coffman said, since it wasn’t every day their son asked for $2 million. The athlete worked with a loan officer who vetted him before the purchase and also handled his parent’s line of credit.
To be sure, this move will not work for everyone. Parents must have enough equity in their homes to make a refinance worth it, and the same goes for the child’s new home. Both parties must be willing to take on the added hassle and cost of two loans. And mixing family and money is often fraught, especially when large sums—and people’s homes—are involved.
Here are a few more things to keep in mind:
Parents have several options for using the equity in their homes, including a cash-out refinance, which allows borrowers to refinance an existing mortgage plus an additional amount and take the difference out in cash; a home-equity loan, which is a loan against the value of a home, including a second mortgage; or a HELOC, which works like a credit card, allowing homeowners to qualify ahead of time and withdraw funds when the child is ready to close.
The biggest risk is that children will not qualify for a loan—or as big a loan as expected—especially if they pay above the asking price or the market cools. To help avoid this outcome, let the lender know your plans ahead of time, Mr. Divband said. It may be more convenient to use one loan officer for both transactions.
Note that some lenders want buyers to live in a home for three to six months before refinancing. An alternative is a delayed-financing mortgage, which allows a buyer to purchase the home in cash and refinance the day after closing for up to 80% of the value of the home, said Peter Lucia, a production manager at Brecksville, Ohio-based CrossCountry Mortgage.
Parents should do the same kind of due diligence as a lender, including vetting children’s finances. Tim Manni, a mortgage expert with NerdWallet, a San Francisco-based personal-finance company, recommends working with a lawyer to draw up a family loan agreement setting out repayment terms and other stipulations. For example, parents may want to ask for 5% of the eventual sale price. Buyers may also want to get a home inspection.
A purchase mortgage or a refinance would typically cost about 2% of the loan value, Mr. Lucia said. Most closing costs would apply to two loans instead of one. Luckily, prepayment penalties are rare on primary-residence loans, though they might apply on investment properties, Mr. Lucia said.
Gifts of more than $14,000 per person per year are subject to federal gift taxes for the giver, which could apply to both parents and children. Both parties should consult a tax professional.