Financial requirements for buying a home

2 years ago

last modified: 2 years ago

Please note that there is an update on 12/15/21

My daughter is in real need for a new, home, and I have agreed to help out substantially. On looking at several homes in her desired neighborhood on Zillow, they are all pretty expensive and have high taxes. I'm willing to give her enough money for a 25% to 50% down payment, but am concerned that she might have a problem getting approval from a bank for the rest, based on the running costs. She says that she can afford $1700/mo and I am considering offering enough to bring the cost down to less than that, but not any additional money for the monthly expenses. I assume the bank will analyze her total financial situation before approval. One house, for example, has $18,000/yr in taxes, and that consumes almost her entire monthly budget. I'm actually hoping the bank would refuse the loan for that house.

Featured Answer

bry911

2 years ago

My advice: Do not get joint ownership on your daughter's primary residence. There is a massive difference between giving your child a gift and inserting yourself into their primary residence. In my experience, rarely does the latter lead to a better relationship.

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Comments (36)

littlebug zone 5 Missouri
2 years ago
last modified: 2 years ago
When one of our sons was buying his first home, his bank wouldn’t loan him the money if a certain percentage (I forget exactly what % it was) of the cash he was bringing to the table as a down payment was GIVEN TO HIM in the last 12 months. I don’t know if that was that bank’s own policy or not; it was their way of helping confirm that he had the ability to pay the mortgage, insurance, taxes, etc. HIMSELF without our help.

We gave him some help with his down payment but I remember we had to stay below the bank’s threshold. This was about 4 years ago in Missouri.
mtvhike
Original Author
2 years ago
Thanks Littlebug. I had known that money given by parents doesn't count for the down payment, if the buyer is trying to get below the 20% down figure (to avoid PMI), but I don't know the details.
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elcieg
2 years ago
last modified: 2 years ago
You do not say why your daughter is in real need of a new home...slippery slope, possibly.

Gifted money may count for the downpayment, but there is more to it than just having a downpayment.

Even though lenders may allow gift funds, they also require mortgage applicants to disclose the source of these funds. Remember, when applying for a mortgage loan, the lender needs a clear picture of her financial situation. This includes information about her employment, income, and assets. This is why a lender will ask for copies of her most recent bank statements.

Suggest your daughter look at homes that she can afford...by that I mean

her savings for the 20% downpayment will determine her price point.

After that you could help her with the cost of remodeling, or helping her make ends meet at the end of the month; whatever you feel comfortable doing for her.

Is your daughter a first-time home buyer? There are some options for her:

https://themortgagereports.com/33553/complete-guide-to-down-payment-assistance-in-the-usa

Or, as we were conservative love helping my child parents, suggest you consult a real estate attorney; consider buying the house yourself (reasonable...not $18,000. in real estate taxes..absurd) and then she rents it from you with option to buy.

Your daughter benefits and you don't lose your investment (help, gift).
aelem
2 years ago
Wonderful for you to help out your daughter. My hunch is she may need to recalibrate wants vs needs. She has two hurdles to clear for financing 1. Balance Sheet (e.g. down payment) and 2. Income statement (e.g. ability to pay mortgage + property taxes + insurance). There are debt to income ratios used (e.g. max of 28%/36%). My recommendation would be first to sit down together and put all the financial pieces together. It is not fun but knowing current monthly inflow and outflow is a foundational step to figuring out what she can afford. Best wishes.
cd7733
2 years ago
If she has good to excellent credit, she could qualify for a piggyback loan aka 85 - 10 - 5 loan to avoid PMI: 85% conventional mortgage, 10% cash down payment, 5% higher interest short term mortgage. There's also 80 - 10 - 10 loans. You have to use a traditional mortgage broker, most banks and companies do no do those kinds of loans or even know they exist.

Speak with a mortgage broker and discuss gift amounts. It could be possible to qualify for the above loan, you gift a certain amount, and then after closing, keys in hand, you pay off the high interest short term mortgage.

Do not give any money or have her buy any large purchases 6 months before or during the buying process. The lender will get fussy! We've done two oopsies over the years that could have pushed back or dropped our funding: bought a car 4 months before talking to broker for a house and another time sold a car for under 15g 2 months before talks and had to jump through hoops to prove it was a sale and not a gift.

I also like to follow the 25% rule for mortgages. Share this with her: To calculate how much house you can afford, use the 25% rule—never spend more than 25% of your monthly take-home pay (after tax) on monthly mortgage payments. That 25% limit includes principal, interest, property taxes, home insurance, private mortgage insurance (PMI) and don’t forget to consider homeowners association (HOA) fees.

https://www.ramseysolutions.com/real-estate/how-much-house-can-i-afford
mtvhike
Original Author
2 years ago
Some of you may not have understood that my daughter doesn't need help with the down payment - she can put 20-25% down. It's just that the balance is too large for her to manage, so we want to give her another 20-25% to add to the down payment to keep the payments under her $1700 limit.

I need to convince her that she can't have the house she desires in the neighborhood she desires. The area she is looking at is Evanston, Winnetka, and Wilmette, Illinois (north of Chicago), within walking a mile of Lake Michigan.
G W
2 years ago
Oh my! Lake Michigan accessible does not usually mean affordable! How old is your daughter? It sounds like she does okay with saving...is her money management otherwise up to snuff? Perhaps it's just a matter of running some numbers together and talking about what-ifs to help her understand what's possible. On the other hand, your post gives me the slight (perhaps undeserved) sense that you might be worried that she doesn't see this as a one time gift, and that there might be an expectation that you'll bail her out if/when things get tight. That would be another conversation. If it's just about the financial realities and the process for loaning money, meet with a loan officer or two to talk things out.
G W
2 years ago
Let me amend that....perhaps a financial advisor other than a loan officer. Loan officers always tell us we can afford far more than we're comfortable with, so that might back fire on you.
bry911
2 years ago
last modified: 2 years ago
Just my 2 cents...

First, all money that goes toward the home is downpayment. You can't give an additional 20%-25% and say it is not a downpayment. So regardless how much she has, your gift will be considered down payment also.

The good news is typically gifted money can be used as a downpayment you just have to provide a formal gift letter that notes there is no repayment requirement of any kind. Banks get a lot of leeway, so your bank may have different requirements, but gift letters are pretty standard practice so you can find a lender who will accept one.

---

Now for some bad news, the bank will use debt to income to qualify your daughter, and with such a high downpayment they may approve a higher (worse) debt to income ratio. This is because there is very little risk to the bank with that much equity.

Here is a suggestion: Don't assist your daughter purchasing the house, but instead ensure she gets a recastable loan. Once she has the home, make a large principal payment and have the loan recast. Recasting will cost you a little bit (usually a few hundred $) but avoids all the hassles of helping her out with downpayment and it forces her into a cheaper home as she is going to have to initially qualify with less down and for higher payments.

Recasting will put you in essentially the same position you would have been in anyway (minus the few hundred bucks), but will probably put your daughter in a better financial position (less house payment).

Good luck.
mle0782
2 years ago
Sounds like you are in a difficult predicament and your concerns are spot on. I would think very hard about helping her at all and would actively try to dissuade her from buying in that area. There is a good chance a lender won’t approve her based upon her cash flow, regardless of loan to value ratio. I am a North Shore native and know the area well and from what you are describing, her budget is probably insufficient to buy almost any single family home and most condos in either Evanston or New Trier School District. Taxes are terrible—presently, New Trier homeowners pay property taxes of 2.1% of assessed value which will be recorded as the sale price. Additionally, homeowners have been facing average tax reassessments of 8-10% every 3 years (up to 15% in some areas of the city of Chicago). This tax burden is in large part why the price of most North Shore homes have actually dropped. Sadly, Cook County and Illinois are basically bankrupt so it is unlikely taxes will decrease.
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Flo Mangan
2 years ago
Sometimes “helping” our kids is short term thinking. I would say from what you have said she can’t afford this level location or home. My red flag was when you said “she says she can afford $1700 a month.” That implies you don’t really know all her financial situation? Sounds like she should rent. Btw, couldn’t be a worse time to buy. Prices are sky high and are bound to come down hard and fast. Tell her to save for another year. Where will she get cash for property taxes? This is very risky on all levels. Best of luck. I know it is hard for daddy’s to say no to their daughters but best you say “not right now”. She will learn and grow stronger. Fingers crossed for you both!!
Elmer J Fudd
2 years ago
last modified: 2 years ago
Sorry but I think there's a lot of misinformation and bad advice contained in many of the preceding comments. Well intentioned I'm sure but oh my.

The easiest way to do this, and what I've seen done many times by people I know, is to buy the house jointly with your daughter. With stated ownership percentages for you and her. All cards face up on the table, the lenders will appreciate that. Speak to a few lenders first, learn of their practices and what they like to see. They all see such situations every day.

Over time, you can either gift incremental percentages of your ownership share to her or not. You can also share or not share in the periodic ownership costs - the mortgage, taxes, insurances, etc. All as you choose.

Talk to your estate planning lawyer so that you and they are clear about alternatives for what's being done and the estate/gift tax consequences (for now, such a gift would be federal tax free). If you have other children and want to ultimately transfer assets pro-rata, what you do with this house needs to be factored in. That's a simple thing to figure out either now or later.

Good luck.
Connecticut Yankeeeee
2 years ago
Mtvhike- I haven’t fully read all the replies. My initial thought is that your daughter just can’t afford that house. Simple. Taxes are taxes and $18 k per year is not unusual in a nice area. My taxes were about $23k in New York. My kids were each individually approved for way more than they spent for their first homes. (As in, approved for $2.5 M and bought an $850k house.) Better to not be house poor.
Connecticut Yankeeeee
2 years ago
Mtvhike- I may have come off too rough and I apologize. I should have expressed that it’s wonderful for you to want to help your daughter. But like others said, it can be a slippery slope with her financials. And, yes, it’s a lousy time to buy a home. I truly wish you and your daughter the best.
elcieg
2 years ago
Your post and recent comment don't jive.

My daughter is in real need for a new, home, and I have agreed to help out substantially.

Some of you may not have understood that my daughter doesn't need help with the down payment - she can put 20-25% down. It's just that the balance is too large for her to manage, so we want to give her another 20-25% to add to the down payment to keep the payments under her $1700 limit.
elcieg
2 years ago
And never put your name and your daughter's on a deed.

You cause a serious accident and you are sued....part of the home is yours...part of your assests. You loose big time and your daughter has half a home.

Your daughter gets married and it doesn't work out. Her state allows 50/50 in the settlement. Now your ex son-in-law owns 25% of your house.

Let your daughter buy what she can afford. Stay out of it. If she needs help down the road you can be there to help in a financial emergency.
graywings123
2 years ago
Perhaps she needs to expand her search area. Skokie is just west of Evanston. Traditionally, it has some less expensive homes than Evanston, Winnetka, or Wilmette. She can bike over to the lake.
Donald
2 years ago
So she wants you to pay up to half of her new house so she can live in something that’s double of what she could afford on her own? That won’t end well. If she were fiscally responsible she would find a house she could afford on her own without your help, then graciously accept what you give her which would lower her costs greatly and save the difference of what she’s paying versus what she would have been paying so the next time she moves she’ll be able to do it (or get even closer) and buy what she dreams of.
CA Kate z9
2 years ago
My brain went in a slightly different direction.... based on experience. If you give your daughter a lot of money to buy a house she really can't afford, and she eventually defaults and losses the house, all the gift-money you gave her is gone to the lender. We helped one of our children in such a way, and had to buyout the mortgage just to protect the money we gave.

Taxes, insurance, repairs, upkeep, etc. are a huge drain on limited resources that new homeowners frequently forget to think about. Can she even afford to pay those huge taxes? Or will that be a continuing drain on your resources.

Some financial guru once said that you shouldn't give your children resources meant for your retirement because they can borrow and repay a loan, but you cannot borrow to live in your old age.
Toronto Veterinarian
2 years ago
"and she eventually defaults and losses the house, all the gift-money you gave her is gone to the lender."

As is expected...........If you expected it back, then it wasn't "gift-money".
littlebug zone 5 Missouri
2 years ago
last modified: 2 years ago
Tough love sounds like it should be in order here. I know that’s hard.

Her eyes are bigger than her pocketbook. And this situation is ”fraught with fraughtness” as a college professor (my good friend) used to say to her class.
Lisette Mauch
2 years ago
Well, as a former Evanston condo owner, we made the decision to move to a very nearby village when buying a single family home 4 years ago. $1700/month is not going to cut it for monthly take home in Evanston if she wants to be right on the lake, and its even less feasible the further north she goes. You cant even get that a mile from the lake, generally. Additionally, the North Shore IS going to face tax jncreases as someone else mentioned, making that $1700 less attainable.

I think she needs to recalibrate as well, and be realistic about what she needs and what shes pursuing. Why those neighborhoods? I’d be happy to discuss over PM, having been in her shoes so recently.
3onthetree
2 years ago
". . . keep the payments under her $1700 limit.

. . . I need to convince her that she can't have the house she desires in the neighborhood she desires. The area she is looking at is Evanston, Winnetka, and Wilmette"

That is why Grayslake exists. Nothing wrong with affordable suburbs (that's in part why they exist), especially when that is all you can afford.
Lisette Mauch
2 years ago
Also, given how Lake Michigan is rising, the Lake is coming even closer! Just look at rhe beaches, Lee Street Beach shrinks every year, a noticable amount.
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Kitchen Tune-up Zeeland, Sales & Design
2 years ago
As a real estate agent, a good and honest lender is my best friend in these situations. A lender (neutral party, not her parent) is more likely to convince your daughter than you are that this is a bad idea for her financially. Lending restrictions are tighter than ever right now. Find a good mortgage broker and have her go get pre-qualified -- more through than a pre-approval which doesn't require documentation. Do not go to a national bank, use a local mortgage broker.
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Kristin Petro Interiors, Inc.
2 years ago
Btw, couldn’t be a worse time to buy. Prices are sky high and are bound to come down hard and fast. Tell her to save for another year.

I agree with this. It doesn't seem like a good time for a first-time home buyer to invest. Prices in this market are inflated and unless she's planning on substantially improving a degraded property or reselling in the next year or two before a correction, she could stand to lose a lot of money.
bry911
2 years ago
Here is a good article that mirrors some of my thinking on the market and the likelihood of correction.

https://www.bloomberg.com/news/articles/2021-06-10/real-estate-prices-are-soaring-but-there-s-no-sign-of-a-housing-bubble
PN _Bos
2 years ago
My parents helped with my first condo purchase when I was 25, so I think it's great IF parents can afford to help kids. I had the 20% but they didn't want me to drain my saving & gifted me $5K. We looked carefully at my finances (savings, earnings, monthly expenses) to determine my budget. BTW - your daughter can't afford a house with $18,000 taxes – she needs to lower her expectations. When you say you’re willing to give 20% are we talking $15k or $150K? Other things to consider - does she need a house or can she live in a condo? Does she live alone or have a family? Would she get a roommate to help cover costs? I suggest you come up with an amount you’re willing to contribute, add that to her down payment savings, then see what she gets pre-approved for. Use that as a starting point, play with a mortgage calculator to determine what she can comfortably afford monthly and THAT is her budget.
mtvhike thanked PN _Bos
chisue
2 years ago
last modified: 2 years ago
Why does your daughter want to live in those particular suburbs? Work? Schools?

Where does she live now? What are her current monthly expenses? (A mortgage is only one part of being able to afford a home.)

How large a home does she need? These are costly areas, but each has a range of prices, including condos. The home with an $18K tax bill is obviously too expensive for her. (I'll have to go look up taxes on our former Wilmette home -- more than a mile from the lake!)

I have to agree that this is a particularly expensive market, a seller's dream!

OK, I looked. Taxes on the house we bought when our son was an infant are now $10K. My point is that there are many nice houses under a million dollars in the New Trier school district.
mtvhike thanked chisue
mtvhike
Original Author
2 years ago
Paula and Chisue - a couple of things:

1. The $18k tax was just one example for one of the houses, others are more in the range of 10-12k.

2. We're talking about 20% (or more) of the selling price of the home, on top of the 200k she already has.

3. Her family includes a partner and two daughters and is concerned about schools for her 12yo. 4. She is currently living in a coop in the neighborhood she wants - it's close to the home of the father of her 12yo, who visits him regularly; having to drive her there every other day has it's problems. She thinks it's too small, not in square feet, but in rooms - only 2bds and 1 ba.

5. Her partner's job is also nearby.

One glitch in our plan just cropped up - I didn't know that any gift over $15k would require her to pay income taxes on that and, if the gift was substantial - $200k - she would be in a high tax bracket for that year.
bry911
2 years ago
last modified: 2 years ago
@mtvhike You noted: "I didn't know that any gift over $15k would require her to pay income taxes on that and, if the gift was substantial - $200k - she would be in a high tax bracket for that year."

You should speak to your accountant because you are misunderstanding the gift tax rules.

First, gifts are not taxable to the recipient, rather they are taxable to the giver. If you give your daughter $200,000 above the annual gift-tax exclusion ($15,000) and elect not to use your lifetime gift and estate tax exemption, then your daughter will have no additional income and you will have to pay gift tax between $36,000 and $80,000.

Next, the good news, you are unlikely to have to pay that for several reasons:
- The first $15,000 you give any is excluded and you can give many different people $15,000. Your spouse can also give $15,000 per person.
- Once you exceed the $15,000 annually, there is a lifetime gift and estate tax exemption (currently it is at $11.7 million per individual and it increases with inflation). So, assuming you are single, you can give your daughter $215,000 and still be allowed to gift her another $11.5 million (this year's amount) without you or her paying taxes on it.
- If you are in a situation that you are going to exceed the lifetime gift and inheritance tax exemption you need to see an attorney who specializes in estate planning now. You should be using things like Crummey trust's to move money to your daughter anyway.
This is just a quick and dirty explanation and is not meant to replace advice from a tax professional in your area.

-----

My 2 cents and guaranteed to be worth half that. I am planning to either buy both of kids' first homes or contribute significantly towards them. It is a different world today than when I was young and I plan on doing everything possible to make their lives a little easier. I understand the value of hard work and both of my kids have demonstrated that ability well, but I also think we tend to glorify what hard work really means. For too many it means being forced to grind away in a career you don't love because you can't afford to quit. I hope my kids can select the career they love regardless of whether it is the best paying one and this head start will help them achieve that.

Furthermore, when I moved back to the states my only criteria for a home was school district. Both of my kids ended up in prestigious colleges and both had scholarships. The best investment I ever made was that house in that school district. So kudos to you if you can help your grandkids achieve that and don't hesitate to give liberally to your daughter.

Good luck
Caroline Hamilton
2 years ago
I totally agree with Bry. This is an investment in the education of your grandchildren. It is a wonderful gift. My parents paid for my education (private school, undergrad and grad) and I am eternally grateful. Our son will be headed to college in a couple of years and we intend to do the same. If we are able to help with his first home purchase down the road, we absolutely will.
Lisette Mauch
2 years ago
Well there is a big difference between Evanston, Wilmette and Winnetka.

One commonality is that they will ALL see a major increase in property taxes as they’ve been historically undervalued while properties in the south and southwest have paid far more than they should.

At even the norm (around here) of $10-12k in property taxes thats a hefty chunk of her planned monthly $1700. ComEd and Nicor should be able to give her average utility costs for any home she is considering, to allow to figure out if $1700 is reasonable, even with a healthy downpayment.
PRO
CoolAir Inc.
2 years ago
Helping your daughter is wonderful.Making thing easier for her buying her own place is just fine. even with 1700 with 50 percent down payement is a big amount.
mtvhike
Original Author
2 years ago
last modified: 2 years ago
Sorry for resurrecting this thread, but the issue is continuing. First, recent history: She as been approved for two houses in Winnetka. One, at $825k she lost out to a full-price cash offer, which was accepted by the seller. The second, lower price (I can't remember how much) was accepted, and she was preparing for that purchase when the first one came back on the market because there was a buried oil tank problem. She quickly resubmitted her $825k offer, but was scooped again. Then, rethought the second house and backed out (even all the financials were approved) because the entire back yard was on an abandoned street which was still listed as town property. Now she has found another and her full-price offer has been "informally" accepted, with a closing date in February.

Thank you to those who encouraged us to substantially help with this purchase. A few additional details:

1. Her 4-year old is Autistic and needs substantial help. The North Shore school districts will allow an aide to accompany her in school, which Chicago, Evanston, Skokie and others won't. That's important.

2. She has saved enough that, when combined with our gift, gives her a down payment of 50%. Taxes are a little lower than the figure I mentioned earlier, but not much. The house is apparently in very good condition, she is having an inspection in two days.

3. Real Estate is moving very fast now; she has lost out on two other houses because they came on the market (one as a private sale) and were sold within 24 hours, so she has to make decisions quickly. This new house was only put on the market two days before she made her accepted offer.

4. One thing which does bother us is that it was purchased by the current owner on 4/1/2020, for $230k less than the asking price and listed on 12/6/2021.

Financial requirements for buying a home

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