With bidding wars becoming increasingly prevalent in a housing market that’s plagued by low inventories, some parents and their adult children are teaming up to help them better compete.
An article in the Wall Street Journal sheds more light on the tactic, which involves parents refinancing their homes and then using some or all of that equity in order to finance their kids’ own home purchase. In many cases, once the kids have finished buying their home, they’ll then refinance that property in order to pay back mom and dad.
The trend is growing because many younger adults are finding it increasingly difficult to compete in bidding wars that crop up as buyers fight for the limited properties available for sale. By using the equity from their parents homes, adult children can avoid the disadvantage of their own home offers being contingent on financing.
There exist several options for tapping into the equity built up in homes, for example home equity loans and cash out refinancing.
Washington D.C.-based Redfin real estate agent Kas Divband told the WSJ that he’s helped work on six deals that were reliant on a parent’s equity being used to make an all-cash offer.
The trend is growing because younger adults, even those with high-paying jobs and a sizable down payment saved up, are struggling to win bidding wars against older individuals, said Nela Richardson, Redfin’s chief economist. Richardson said that by taking out a home equity line of credit, some millennials actually find themselves in a better position to come out on top against multiple bidders.
A second way that parents are helping their kids is when the appraised value of the home they’re trying to buy comes in at less than the agreed price. In such situations, lenders will refuse to pay the difference, and that means buyers need to come up with the extra funds themselves if they can’t get the seller to reduce the price.
These kinds of arrangements are totally legal, the WSJ says, though they may not always be practical. For instance, they will only work if the parents have enough equity built up in their home that refinancing is actually worth bothering with. And their child will still need to be able to qualify for the mortgage. As such, Redfin’s Divband says it’s usually best to let lenders know what the plan is.
Parents will also need to know the additional costs of refinancing. Lenders generally charge around two percent of the value of the loan in fees, and then there are gift rules too – according to the IRS, gifts of more than $14,000 per year are subject to taxation.