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Parents' help in buying home can be tricky


Housing experts say 1992 could be the best time in two decades to buy a first home. Mortgage rates are low. Home prices have moderated. And incentives for first-time buyers abound. But if you're like millions of young adults across America, you're sitting on the sidelines for lack of cash.

Could your parents help? Fully 30 percent of first-home purchases are assisted by parents, points out Peter G. Miller, the Silver Spring-based author of "Buy Your First Home Now," a HarperCollins book.

Still, for the sake of family harmony, he suggests taking a diplomatic approach to the delicate issue of asking parents for money. It's crucial to consider your parents' financial well-being as well as your own, he says.

"It's very presumptuous for kids to think mom and dad are automatically going to chip in -- as if it's a natural right. On the other hand, some parents may be happy to participate," Mr. Miller says.

Realty experts say too many young adults wait until they're on the verge of signing a sales contract -- or have already signed one -- before they approach their parents for help. It's natural that many young people, eager to assert their independence, are so sheepish that they postpone asking their parents for help. But waiting until the last minute puts needless pressure on parents, who must consider their own finances and whether they have enough money to help other siblings, too.

"There can be familial fireworks if the parents provide for the housing needs of one child but not the others," Mr. Miller cautions.

Even if your parents are wealthy and willing, waiting until the eleventh hour limits your chance to debate the pros and cons of other forms of assistance and the tax consequences for all concerned.

"You have to ask the question, 'What kind of help are your parents giving you? Is it a gift, a loan or an investment?' " Mr. Miller says. A heart-to-heart discussion should reveal not only your parents' capacity to assist but also their objectives in doing so.

For those seeking help from their parents to buy a home, realty specialists offer these pointers:

* Consider bringing your parents with you to a pre-qualification interview with a local mortgage lender.

It's always a good idea to define the boundaries of your borrowing ability before you shop for a home. Why waste time looking outside your league? The lender will look at your income and debt and give you a clear idea of the size of a mortgage you can manage.

A lender can offer you more precise financing information than most realty agents, says John Lloyd, Baltimore branch manager for Sears Mortgage Corp. And the lender's analysis becomes vital when parents get into the homebuying act, he says. Your parents need to know how much help you'll need and what form it should or could take.

* Remember, there are limits on your ability to take on a loan from your parents.

Lenders know a homebuyer bearing too much debt is more likely to default, Mr. Lloyd says. Anyway, lenders must work within predictable debt-to-income ratios set by such big quasi-government institutions as Fannie Mae and Freddie Mac, which buy billions of dollars' worth of mortgages. Mortgages that aren't made according to the rules set by these institutions can't be sold into this so-called "secondary market" and that puts the lender in a bind.

What many forget is that lenders have to count the debt owed your parents, just as they count the debt on your credit card or car loan. Too much debt of any sort means you won't get the mortgage. That's why most parents end up pledging their financial help through a "gift letter" that assures no repayment will ever be required.

* Never pretend that a loan from your parents is really a gift.

"Lenders take gift letters very seriously. They're not interested in a gift letter where the kids have a side understanding that they'll pay their parents back," says Mr. Miller, the author.

Your lender probably will want your parents' gift letter signed and notarized during the mortgage application process. He also will demand that your parents prove they have the means to make the gift -- whether it be money in their bank account or an available line of credit on their home equity loan.

If you claim that a loan is really a gift, you're committing fraud. And the fraudulent document could backfire if you fall behind on your payments and your lender begins to investigate. If you've made false statements on your application, the lender could demand immediate payment of your debt in full.

* Consider taking a "sleeper second mortgage" from your parents instead of a gift.

"What the parent is saying is 'I don't want to give you the money. But I will give you a loan that's payment-free until you can afford to pay me back,' " says Norman D. Flynn, former president of the National Association of Realtors. As long as they're properly documented, such second mortgages are acceptable to lenders. And, they aren't counted in calculating current debt ratios.

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