How can I help my child buy her first home?

Posted by  on May 24, 2011

I own my own home free and clear, and am considering taking a loan against it to help my daughter buy a house. How do I go about doing this?

You can take a mortgage out against your property (assuming that you have the income and credit to qualify). It would be considered a cash-out refinance. The proceeds could be used to buy a new home outright or as a down payment, with your daughter taking out a mortgage for the balance. If you want her to pay you back, you could record a lien against the property after the purchase takes place. To be eligible for the best mortgage rates, you wouldn't want to cash out more than 60 percent of your equity, and you'll need excellent credit as well. Or you could get an FHA cash-out refinance to 85 percent of your home's value. There are no surcharges but there is mortgage insurance required.

If you are 62 or older, you have another option to trade equity in your home for cash--a reverse mortgage. This is a more expensive choice, so I'd only recommend it if you can't qualify for a cash-out refinance and you still want to help your daughter. The nice thing about a reverse mortgage is that you can get money for your daughter (and yourself as well if there is enough home equity) and you'd be required to make no payments while you live in the home.

Finally, you could take out an FHA mortgage as a non-occupant co-borrower. You and your daughter would both be on the mortgage, and it would only require 3.5 percent down. This could allow you to keep the title on your own home clear, protecting your ownership interest. This option is frequently used by parents who buy small homes for their children while they attend college--hence its nickname, the "kiddie condo" program.

Which ever option you choose, meet with a tax or financial advisor first; there are probaly tax and legal-related items you'll need to attend to.


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