The Mortgage Brothers Show
Parent and Child Co-borrowers: What You Need to Know
Did you know that in certain circumstances a parent can purchase a home for their child without the child being on the loan and we would do the loan as a “primary residence?” Yes, it’s true. Also, vice versa, a child can purchase a home for their parent without the parent being on the loan and we would do the loan as a “primary residence.”
*The following transcript has been edited for clarity.
Eddie Knoell — I’m Eddie Knoell.
Tom Knoell — And I’m Tom Knoell.
Eddie — We’re the Mortgage Brothers Team and this is the Mortgage Brothers Podcast. Welcome everyone. Today we are talking about something that I think all of us… All of us have parents, not all of us have kids.
Tom — Right. Well, most of us have parents that are still living.
Eddie — Yeah, that’s right. So we have… We’re going to talk about mortgages that involve children and parents, whether you’re a parent buying a house for a child or a child helping a parent out and buying them a house.
Tom — That’s right.
Eddie — And there are different ways to structure the loan. Even though you’re not going to live in it, we can structure these loans as primary residence loans. That’s what we’re going to cover.
Tom — So, and I’m going to… I think I’m going to trademark this name for this loan. You ready for this? Yeah, no one’s ever heard this before. We’re going to call it the boomerang loan.
Eddie — Boomerang. It’s going to come around?
Tom — The boomerang. It’s going to come around. And it probably applies more to the child who’s helping their parent, but also kids too. You think your kids are out of the house? Shoot, nope, they’re right back in your financial house. “Hey Mom, hey Dad, can you help me get a loan?
Eddie — Yeah.
Tom — So anyway, we’re going to call it the boomerang.
Eddie — That’s the truth. I mean, kids, your parents kick you out and then 20 years later you’re going through their finances and helping them out too… You know, this happens a lot of times. It’s like we have a lot… I’m working with a customer right now, we’re helping out their dad and it’s really important. I mean, the dad is an elderly man, great guy, but his daughters are helping him and it’s awesome to see.
Tom — And I got a call a couple of days ago and frankly, it can be an emotional call to where the son called me and had said, “You know what? I realized that my dad’s in some financial stress and I never knew it, Tom. And we need to be able to help him.” So we started digging into how exactly he could help, which is one reason why we’re talking about this today. I think you and I talked, there are really two different buckets of how parents and children can help each other. And one of those buckets is if you’re disabled. We’re really not focusing on that today, correct?
Eddie — Well, we can. We can talk about… Okay, parents and children can help each other out. Where I say parents can help their children and children can help their parents. So maybe we just talk about the typical scenario with the majority of loans are… Let’s just take the child who’s in school and the parents want to help out the child. They’re in college and they want to buy a condo down by ASU.
Tom — Yup. Okay. So, just to set this up, we are not talking about a disabled child or a disabled parent. So you have a typical child or a typical parent. Okay. They’re going to school at ASU. All right. Keep going.
Eddie — Yeah. So in this scenario, this is the most common scenario, is that we have parents who have the financial ability to help their child buy a house. They will both be on the loan. Okay? Even though the child does not have an income today, a stable income, the child will be on the loan, they will occupy the home and this will be… We’ll call this loan, and what we call this a primary residence. Even though the parents are providing all the income and assets.
Tom — Right. And then this is probably the most typical situation that’s known as having a co-signer or a co-borrower. You pay your bills on time. You’re working hard or you’re working at school and you just simply can’t afford a home. Or conversely, if you’re the parent, you’re working hard, you’re on… Or you’re not able to work. You’re not disabled, but you’re not able to work and you’re living off social security and paying all your bills on time, you just can’t afford the home. So that’s when you get a parent or child that comes in and basically helps with their income.
Eddie — That’s right. In simplest terms, it’s putting a co-borrower on and that co-borrower is a family member and that’s important. It has to be a family member.
Tom — Okay.
Eddie — There might be some… There are some rare exceptions but let’s just keep it to the family members.
Tom — Right. Okay. And the real important nuance to this is that they are co-borrowing with the initial or with the primary borrower, which means that the primary borrower, whether it be the child or the parent, is still on the loan, which means we still look at credit. We still look at the characteristics and profiles of that borrower. That’s really important.
Eddie — Yes. And we’re going to use the lower… Whoever the parents or the child, we’re going to use both credit scores and we’re going to use the lowest mid score of either one.
Tom — Right.
Eddie — If the child has been late on credit cards or something like that and they have a 640, we’re going to be using the 640 to… In the mortgage industry, that’s what they’ll do.
Tom — Right? So, if you have a child there are two different scenarios… Johnny does not make any income, is not going to school but plays video games all day versus Jay, who makes no income but currently goes to school… I left out and Johnny also has terrible credit. So Johnny stays home, plays video games and has terrible credit. Okay? That’s a different situation than Jay, who has no income, stays home so to speak, he’s going to school but does not have income, but has good credit.
Eddie — Right. If someone has bad credit, they can’t be on the loan. We can’t do the… So exactly. So if the parents try to help their child out, the child has bad credit, the child cannot go on the loan. If the child cannot go on the loan, then we cannot do the loan as a primary residence and the parent has to buy this home if they need to as an investment home.
Tom — Right. So I need to –
Eddie — 20% percent down and, you know.
Tom — Exactly. And we can do that and some people will find a way that it’s important enough. When my kids going to school at ASU, like you had said, was late on some credit cards that they picked up during high school and early years in college, and he can’t get on the loan, so we’re going to just go ahead and buy an investment property, which is totally fine. But I think that’s probably the key, is that parents can help children and children can help parents, but that person that they’re helping has to have a good credit history.
Eddie — Yeah, that’s right.
Tom — And a lot of people do not know that.
Eddie — Yeah. And I think that when children are buying and helping their parents out, it’s usually because of the income issue. Let’s just say mom is only making social security income. She can’t afford the mortgage. The child can help be the co-borrower and they can do it.
Tom — Right. And in the situation that I had at the very beginning where the son had this stark realization that his father wasn’t able to make payments, what had happened was the son wasn’t able to buy the house for his father or get on a loan for his father and keep the house as a primary because his father was behind on mortgage like three or four months. And all of a sudden that disqualified the father from being able to stay on the loan. So the son had to have bought his father’s house as an investment property, which he did not want to do.
Eddie — So, again people, that is a typical co-borrower situation, whether you’re a parent or a child. Again, this can be any relative, it can be aunt and uncle, cousins, things like that. But one of the situations, maybe we can just briefly touch on this, is if you have a parent or child that is disabled, an elderly parent who’s disabled and cannot be… Basically, the parent is unable to work. If the child is unable to work and you want to help them out, you can actually, there’s an exception that you can actually purchase the home in your name, the child or parent’s name, as a primary residence. So, if your child is disabled, you can buy the home for your child –
Tom — And your child is not on the loan at all.
Eddie — And the child’s not on the loan.
Tom — That’s right. That can be their –
Eddie — If your mom or dad are elderly and they cannot work, they cannot be on the loan. You know what I mean? If we’re not going to put them on the loan and they’re just unable to sufficiently provide the income to qualify, we can actually do the loan in your name, the child’s name. The parent does not have to be on the loan. This has to do with disability and the inability to work and make an income.
Tom — Right.
Eddie — And it usually comes down to we have to prove the disability.
Tom — Right, exactly. And if you are disabled, again, and you’re not on a loan, they’re not looking at credit. So none of that matters. So really two different buckets. If you’re disabled, you fall into a bucket where there’s quite a bit of leeway and your parents or family member can help buy a house for you. If you’re not disabled, you still need to have decent credit and will need to be on the loan, but your parents can help be on that loan and have it still be considered a primary residence for that primary borrower.
Eddie — Yes. And of course, the home, and I’m going to say it again, the primary residence gives you better rates and lower down payments. The requirements have lower down payments. So it really is a benefit to structure this way if we can.
Tom — Huge. Yeah.
Eddie — So I think we’ve covered both of those situations. If anyone has any questions…
Tom — You know what? One last thing. I did talk to a borrower several months ago and she said, “My dad can’t afford it.” And I said, “Well, how much does he make?” “Well, he makes $6,000 a month.” It’s like holy cow. So the reason why he couldn’t afford it was because he had a couple of cars, he had some high bills and –
Eddie — A lot of debt, yeah.
Tom — … lot of debt. That doesn’t qualify as not being able to afford. So he had good credit, but he made too much money. And we don’t have an objective number as to what is too much, but it really is, thankfully, it’s a reasonable common sense approach that if we look at your parents or your children’s file and we realize they really can’t afford a home and they live modestly, then that’s when you fall into, yes, that would qualify. But you just can’t have a ton of debt and say, “Son, can you help me? Because I just can’t afford my mortgage anymore.”
Eddie — Right, and it really… Correct, that’s right. So just give us a call if you have any questions on that. We’ll be able to get you an answer.
Tom — All right, let’s call it a day.
Eddie — All right. Have a good night everyone.
Tom — We’ll see you, folks.
Eddie — Bye. Hey guys, thanks for listening to the Mortgage Brothers Show. Please let us know if you have any questions you’d like us to answer on this podcast. You can email your questions. There’s firstname.lastname@example.org or yours truly, at email@example.com and be sure to ask us for a free quote on your next mortgage. Tom and I will personally work with you and help you through the whole process.
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