It feels like the combination of outrageous rental rates, the stress test, and a hot housing market has pushed clients to find more creative ways to qualify for their mortgages.
Over the last few years I’ve seen more clients either adding a parent as a co-signor on their mortgage, or buying a multi-unit home with family where both live together.
I’ve seen an increase in the number of files with gifted down payments from family.
I’ve also seen couples that haven’t been together very long buying together because one or the other doesn’t qualify alone.
For situations where parents are co-signing, part of the conversation I have upfront with my clients is around their exit strategy.
In some cases we are needing a co-signor as one client doesn’t have an established credit history, or has bruised credit. In this situation, we talk about what needs to be done to establish a credit history and the plan is to touch base in two to three years to see if the co-signor can be removed.
In other cases the clients need to work on reducing other debt so they are able to qualify without co-signors down the road.
I always cover the importance of getting solid legal advice. Mixing money and family has the potential to go sideways in so many ways.
I had a call from one gentleman (not a client of mine) who had gifted his son and his girlfriend $70,000 for their down payment and closing costs. Two years later the son and his girlfriend are parting company, and she is now entitled to half of the equity in the home, which of course includes half of the original gifted down payment.
Over the last few months I’ve worked with several clients where they are now needing to sell their home to payout the other person’s equity as they are going their separate ways.
Lenders require a gift letter signed stating that gifted funds are a true gift and not repayable. This gentleman signed the gift letter but I’m sure did not expect to see the relationship dissolve so soon.
Over the last few months I’ve worked with several clients where they are now needing to sell their home to pay out the other person’s equity as they are going their separate ways. Trying to buy a comparable home sometimes doesn’t happen.
If you are considering gifting a down payment or co-signing for family, make sure you understand what you are getting into and how long you will be committed for. If you are buying a home together with the intention of splitting equity down the road, take the time upfront to draw up a document that goes over the “what-ifs” and outlines who will be entitled to what.
Having difficult conversations upfront can save much pain and hopefully save relationships if things don’t go according to plan down the road.
This all sounds gloom and doom, and there are certainly situations that go sideways.
On the other hand, I work with other clients where either adding a co-signor or having gifted equity works brilliantly as a short-term plan to help clients get into the housing market.
As an example, I’m working with clients in northern B.C. where the husband has transferred from Fort St. John to Prince George for a fantastic opportunity with his current employer. They are buying a beautiful new home that is priced slightly higher than what they qualify for on his salary alone.
She is also a professional but doesn’t have a job lined up in Prince George yet. They have managed their finances well and have a significant down payment of their own. We are adding her parents to the application so that they are able to buy right away. Once she has employment and is through her probation period we will be looking to remove the parents from the mortgage.
On what may be a more positive note, I’ve seen several articles this past week about how the housing market seems to be cooling a little. I’ve felt a small difference in the pressure some of my clients are experiencing trying to buy.
I am really hoping things settle and go back to the dynamics of even a few years ago. A more balanced market will allow clients the time to confidently decide on which home is right for them instead of competing to buy a home that truly isn’t the best fit for them.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.