Buying A House For Your Parents: 5 Ways To Make It Happen

Buying a house for parents is a gift they will never forget, especially if they are in need as they grow older. While a comfortable home can be invaluable to your parents, it can also be an excellent investment for you. It may seem like a lofty expense, but there are several affordable options, including one vital program designed for this exact scenario. Follow along below to discover how you can be your parents' favorite child by buying them their dream home!

How To Best Prepare For Buying A House For Your Parents

While it can benefit all parties, there is much to consider before you decide to buy a house for parents. It is best to be in a financially stable position where you can sustain your desired lifestyle after the purchase. To ensure your finances are ready for buying a house for parents, take these three steps before beginning your home search:

• Hold a good credit score. If you have a mortgage for your own home and have never missed a payment, you may have an excellent credit score for a mortgage. A credit history that shows no missed payments and a low debt-to-income ratio will prove to lenders that you can handle an additional mortgage.
• Plan your budget. Knowing your overall budget, including upfront and recurring home costs, is critical to determine whether you can afford to buy your parents a home. Don't forget to factor in an emergency fund for surprise maintenance costs that come with a house, especially if your parents cannot handle them independently.
• Prepare long-term. Look into the future to plan for any possible scenarios. Will you sell the house if your parents pass away or move into a nursing home? Will you keep the home and look for tenants to rent it to? Make sure you have multiple options for issues that arise across an extended time frame.

5 Ways To Go About Buying A House For Your Parents

There are an array of options for buying a house for parents, whether you can provide cash upfront, a solid credit score or finance the entire home.

1. Co-Sign On A Mortgage

Co-signing on a mortgage with your parents is a great way to use your excellent credit score to help them buy a home without providing any capital. But it does come with some risk, so it's essential to understand what you are signing up for.

Co-signing a mortgage for your parents means you guarantee the loan for them. If you have a better credit score than them or a larger consistent income, this added protection makes it easier for the lender to grant them a loan they could not qualify for on their own. However, if your parents cannot pay their mortgage at any point, you are responsible for making the payments. If you also can't make the payments, both of your credit scores will take a significant hit, and your parents will risk losing their home. So, while you may not have to pay housing costs as a co-signer, it is best to be in a financial situation that allows you to pay if necessary.

The main upside of co-signing a mortgage is that, in the best-case scenario, you can help your parents purchase the home they want without actually spending any money. However, you are accepting the risk of the mortgage without any of the benefits of homeownership, such as building equity or collecting homeownership tax benefits. Make sure to weigh these pros and cons before you co-sign.

2. Provide Down Payment Assistance

If you don't want to risk your credit score but have extra money to contribute, consider saving for a down payment for your parents' home. If your parents have good credit scores and a consistent income to pay their mortgage every month but are missing the crucial upfront costs of buying a home, providing down payment assistance could be the best way to help.

A pro of only providing a down payment is that your risk is fixed to the amount you provide. You don't risk paying the mortgage for an unspecified amount of time, and your credit score is not at risk. On the other hand, you may need to provide a large amount of money upfront. Depending on the type of mortgage, a down payment could cost 3% to 20% of the home's value.

3. Buy A Second Home Yourself

Buying a second home for your parents to use as their primary residence is also an option. This option is good if you have elderly parents with little savings or consistent income. While you may not benefit from living in your second home or using it as a vacation home, you may benefit from the rising value of the house and your increasing equity over time. You could also take advantage of your current home's equity to fund the purchase of the second home. If you have more than 20% equity in your home, you could do a cash-out refinance to turn your current home’s equity into cash to use for the second home.

Before taking these steps, it is essential to review your financial situation to ensure that you can afford to pay both mortgages. Keep in mind that the requirements to qualify for a mortgage are typically higher for houses in which the owner will not live. You may be required to put down at least 20% for the down payment alone. Lenders may also require the home to be more than 50 miles from your primary residence, which may not be suitable for elderly parents that need consistent care.

If you determine that the upfront and recurring expenses of a new home fit your budget, a conventional loan may be the right option for you.

4. Get A Fannie Mae Family Opportunity Mortgage

The Fannie Mae Family Opportunity Mortgage allows you to get a mortgage for your parents with similar requirements as an owner-occupied property. That means instead of paying higher mortgage rates and a higher down payment typical for second homes, a lender will give you rates as if you were purchasing a home to be your primary residence. You can also use the Family Opportunity Mortgage to buy a home for a child or disabled family member. Check out the requirements below to determine if you qualify for a Family Opportunity Mortgage.

How To Qualify For The Fannie Mae Family Opportunity Mortgage

• Credit score of 620 or higher
• Minimum 5% down payment
• Debt-to-income ratio of no more than 45%
• Proof of steady employment income
• Proof of parents' insufficient income

Benefits Of The Fannie Mae Family Opportunity Mortgage

Fannie Mae Family Opportunity Mortgages are a great option for children looking to give their elderly parents an affordable home nearby their primary residence. If the typical requirements for a second home stretch your budget, this may be the right option for you. The benefits include but are not limited to:

• Lower down payment and interest rates
• Fewer closing costs
• Zero occupancy requirements
• Zero distance requirements from your primary residence

5. Become Your Parents’ Landlord

Buying a home as an investment property and renting it to your parents is a great way to help your parents while avoiding some of the recurring costs of homeownership. Remember that the requirements to qualify for a loan for an investment property may be even more significant than those for a second home.

While lenders do not typically have location requirements for investment properties, they will likely require a credit score of at least 620 and DTI below 43%. You may also be required to prove that you have at least 6 months' worth of expenses for the home in reserve. The higher the loan's value, the higher these requirements can be.

Whose Name Goes On The House Deed?

You can put your name, your parents' names or all of your names on the house deed when you buy a home for your parents, but there are legal and financial ramifications to each option. If only your parents' names are on the deed, you could avoid paying the property taxes throughout the time they live there and the capital gains taxes when you sell the home. While this could benefit you financially, it could also affect your parents' eligibility for Medicaid if they're enrolled.

The Bottom Line: Buying A House With Elderly Parents Is Doable With Financial Planning

With enough preparation, buying a house for your parents can be a generous act that also pays for itself in a short and long-term time frame. But before you even begin looking for the perfect home, sit down with your parents to review your financial situations to clarify what options both of you can afford. Depending on your finances, it is possible to help your parents buy a home without additional debt. All the options listed above can lead to varying costs for both parties, so it is best to determine who will cover these costs at the outset of the arrangement.

Once you've researched and determined the right financial arrangement for you and your parents, it's time to start the approval process with Rocket Mortgage^® and get your parents into a home they love today!