Question: I think this is a great time to buy a home but I have been saving money but don’t have enough for a down payment. My parents are willing to help; what would be the best way for them to help me with buying a home?
Answer: I agree that now is an excellent time to purchase a home. As I have said in recent articles, the prices are likely at their lowest and certainly the interest rates are at historical lows. Many first time buyers are looking for help from relatives, usually parents, to help them afford that first home. You are fortunate to be one of those children with parents that want to help you accomplish that goal. If you finance through an FHA loan, then it is possible to purchase with only 3.5% down. While that does not sound like very much, on a $500,000 purchase it is a down payment of $17,500. I believe there are 10% options and, of course, a conventional down payment of 20%. At 20% you would need $100,000 to purchase that $500,000 home. The best and easiest way for your parents to help is to give you a gift letter for the amount they are willing to contribute. When you meet with a mortgage lender, you can show them this letter from your parents. With that commitment in hand the lender can determine what level of loan you can afford and qualify for in your purchase. Before lenders approve a loan they have to determine the source of all funds used in the transaction. If your parents were willing to help you but they wanted the amount to be a loan to you and not a gift, then that would factor in to the lender’s calculation of what amount you can afford. The calculation would include payments back to your parents and you would qualify for a smaller loan. I believe your first step should be to sit down with a mortgage lender and explain what your parents are considering and what you can financially contribute. Then based on your income and current debt costs, the lender can give you an approval letter for the loan amount you would qualify for to purchase a home. Finding the home you desire is really the second step in your new home purchase. As I have said before, it is better to find the home you can afford, than to find the home you love and can’t afford. As a parent, I know the satisfaction your parents will experience to be able to help you in this exciting purchase. You are fortunate to have parents that are capable and willing to help. I wish you good hunting.