DETROIT — As home prices rise and competition for a limited supply of homes increases, young buyers are increasingly using a special financing to win in bidding wars: The Bank of Mom and Dad.
“It’s definitely becoming much more common, not that parents didn’t help their children in the past,” said Jeanette Schneider, vice president of RE/MAX of Southeastern Michigan in Troy. “But, it really has become a trend.”
Several factors, she said, are driving it: Millennials — the generation of young homebuyers ages 18-35 — are facing more competition and costs for homes, they are saddled with more student debt than previous generations, and simply put, their parents seem to be more willing to lend them money.
Based on anecdotal reports from agents, Schneider estimated that nearly 10% of home sales use some kind of family financing or gifts and that could grow if the housing market stays hot. That percentage, she said, is far more prevalent than what she would have estimated when she started in the industry nearly 30 years ago.
An analysis of mortgages serviced by Shore United Bank in Troy, suggests the percentage of home sales using gifts might be even higher. It found that 42% of young homeowners used money that was given to them toward down payments and closing costs.
The trend, however, requires that families be clear on whether the money being given is a loan or a gift. Not only are there relationship concerns to consider, there are legal and tax considerations. Taking out a family loan, even if it is a relatively small one, adds to a homebuyer’s debt, can jeopardize eligibility for mortgage programs and could reduce the attractiveness of an offer to the seller.
A gift means that the homebuyer has no obligation to pay it back — but can if he or she wishes.
Take 24-year-old Amber Hauer, who just bought her first home in July.
For about $145,000, she purchased a 950-square-foot, three-bedroom, one-bath, ranch in Sterling Heights, the same city where she grew up. She looked at dozens of houses, sometimes as many as eight in one day, and made offers on two that were outbid.
To close the deal on a third offer, her grandparents helped her with a downpayment.
“The market was so hot, if something came online, it was gone in a day or two,” Hauer said.
Millennials grew up watching their parents struggle with a recession and housing crash. Now, they are the largest share of homebuyers, according to the National Association of Realtors, a trade association of 1.2 million brokers, agents, property managers and other real estate professionals.
These buyers are eager to build equity and get a place of their own. But, with few assets and limited income in a tight housing market, they are at a big disadvantage when there are more buyers than homes and bids get competitive.
Consider what millennials are facing:
This year, housing prices in metro Detroit have steadily climbed, jumping 7.2% in August compared with a year earlier as home shoppers competed for fewer homes on the market, according to the S&P CoreLogic Case-Shiller index. After August, many homeowners take their property off the market for the holidays — and take a break from shopping.
Prices in metro Detroit — which include Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties — were up 83% in August, compared to their low point in 2011.
“It kind of sucks,” Hauer said. “It’s hard to get a job that pays enough to make a living, let alone buy a house. We’re just trying to do the best we can.”
On top of that, millennials like Hauer are repaying student debt.
Overall, they are spending nearly one-fifth of their income on student loans, and 60% of them now expect to be paying off loans well into their 40s, according to research by Citizens Bank in Providence, R.I. Student debt reduces how much a homebuyer can afford each month.
The one bright spot: Parents seem increasingly more willing — and perhaps more able — to help.
A national poll by GFK Custom Research North America in 2015 found 17% of parents of millennials expected to help them buy a home within the next five years, an increase of 31% compared to poll results in 2010.
Of parents willing to lend, half said they would contribute to a down payment and 20% would co-sign on a loan.
Help from parents, research shows, isn’t limited to mortgages. A New York Times analysis earlier this year concluded that nearly half of millennials in their early to mid-20s in apartments also are getting financial help from their parents to pay the rent.
Finding enough money for a downpayment is the biggest obstacle for many homebuyers, according to the Mortgage Bankers Association in Washington D.C.
“It is not unusual for young homebuyers to seek assistance from the bank of mom and dad,” said Timothy Ross, the CEO of Toss Mortgage in Troy. In many cases, he added, that help is in the form of a gift that goes to a downpayment. “But, if junior chooses to repay dad, that’s his decision.”
The National Association of Realtors estimates 27% of first-time homebuyers receive downpayment gifts from relatives.
“It’s certainly helping a generation be able to get into a home and get homeownership,” Schneider said. “But, the thing that goes through my mind is if you get parents taking out home equity loans, cashing in retirement savings, and things like that, and then there’s some type of economic setback, there could be bigger ramifications.”
To qualify for financing, real estate agents say some young buyers and their parents are getting on what has been called a mortgage merry-go-round:
Parents refinance their home. They use that to purchase another house for their children. After the deal closes, they add their children to the new home’s title, which then becomes an asset to qualify for financing on the new house. The money from the loan on the new house can then go to repay the debt on the parents’ home.
Farmington Hills real estate agent Nathan Boji said he’s seen parents give money, lend money, cosign loans — and even buy homes outright for their kids.
Some parents hope to recoup the costs eventually, but others consider it an early inheritance.
Among Boji’s clients, there was one in his 20s who worked for General Motors. He was seeking to buy a $180,000 condo but didn’t qualify for a mortgage. So, his parents bought the condo for him, added his name to the title. He planned to finance the property to repay his folks.
In another case, Boji said, a married couple in their late 20s and early 30s borrowed money from the wife’s mother for a downpayment on a $280,000 house in Van Buren Township. That wasn’t enough. To get a mortgage, the mother co-signed it, which meant she also accepted responsibility for it if it didn’t get paid.
In a third case, Boji said, the homebuyer was a doctor in his 30s. He made an offer on a $530,000 home in Birmingham. He qualified for a loan through a program set up specifically for physicians. Because the market was competitive, he needed to come to the table with a downpayment he didn’t have. To do so, he sought about $30,000 from his parents and older brother.
To some extent, agents said, some millennials are seeking more expensive first homes because during lean economic times many weren’t buying homes, others just don’t want — or feel they have the time — to do upgrades and renovations.
‘I’m very grateful’
Hauer said she wanted to own her own place so she could invest her money into something that could appreciate in value, a place where she could have friends over and entertain. She started looking at homes in person and online in the summer.
But, even as she shopped, she said, she felt competitive pressure to increase the upper range — $150,000 — of her total homebuying budget.
“I love my parents,” she said. “But, I didn’t want to move in with them.”
At the time, she had an engineering job at Ford and was living in an apartment in Kentucky, but was moving back to Michigan. She also had about $32,000 in college loans for bachelor’s and master’s degrees in engineering and only a few thousand dollars saved for a downpayment.
By her third home offer, she said she wasn’t taking any chances.
Her parents — Denise and Eric Hauer — had helped her with college costs and are now doing the same with her younger brother, Austin, who is a junior also studying engineering. So, she went to her grandparents, Barb and Don Plotzka. They gave her enough money that when combined with her own savings she could put down 20% on the home.
Her offer was accepted.
“I do believe it is harder for them — their generation — to go out on their own to buy their first home than probably it was in our generation,” Denise Hauer said of millennials. “I don’t think the cost of living and everything else that goes into it was as crazy as it is now.”
Since she bought her home, Amber Hauer said she has refinished the wooden floors and painted all the rooms. Color, she said, makes her happy and she has filled the house with it: a yellow kitchen, a blue spare bedroom, a green living room, an orange office.
Officially, Hauer said, the money from her grandparents was a gift.
“She said, ‘Grandpa, can you help me?’ and I said, ‘Yeah. Let me know what you need,’ ” Don Plotzka, 85, recalled. “She said to me, ‘Grandpa, I’ll pay you back.’ But, I thought about it, and said, why don’t you just consider this a gift?”
Had the money been a loan, Hauer said she wouldn’t have qualified for her mortgage. She also wouldn’t have met the 20% ownership threshold to avoid mortgage insurance.
But, Hauer said, she thinks of the gift as a debt that she plans to repay.
“I don’t want to just take that money,” she said. “I’m very grateful to my grandparents.”
Plotzka said he intends to help his three other grandchildren the same way. He decided to do it, he said, because he’s never seen an armored car of money following a hearse, and he would rather give his money away to his grandkids now so he can enjoy watching what they do with it.
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