Purchase-assist financing for a Generation Y (Gen Y) family member by their parents or relative is an especially compelling opportunity in the current real estate market. Intrafamily loans benefit both the parent, as lender, and their offspring, as borrower. It also gets the child out of the house.

Though mortgage rates are at record nominal lows of around 4% fixed for 30 years, the return by lenders to mortgage origination fundamentals is not permissive enough to allow many first-time homebuyers below the age of 30 to obtain a mortgage from an institutional lender. Lack of savings and sufficient income for down payments and monthly payments is the barrier.

The average rate of return on low-risk investments is minute bordering essentially on zero, with a one-year certificate of deposit (CD) being 0.4%, a pittance and small fraction of the current 3% consumer inflation rate. For risk-averse parents reluctant to invest in the stock market and needing a higher rate of return on their savings, financing a child’s home purchase by making them a loan as a mortgage can be the answer to generating higher returns for themselves, while simultaneously leveraging their child’s acquisition of a home.

Though a parent may not prudently lend their child all the mortgage money they need, they can assist by lending funds for a down payment.

However, intrafamily loans do have some practical disadvantages. The child may fail to repay the loan. Also, financing a mortgage limits parents’ financial flexibility, as a substantial portion of their money becomes locked in investment which cannot be quickly liquidated. For gifts to children in one year exceeding $13,000, families need to consider federal gift taxes.

first tuesday take: Brokers and agents representing buyers with trouble accessing cash can recommend intrafamily loans as an alternative financing option. Young buyers with wealthy families can benefit from the implicit promise to cooperate with their parents, who loan them money to purchase their first homes.

Acting out of non-business reasons, parents will help their children in times of financial difficulties, in contrast to institutional lenders that would simply foreclose on their loans.

In order for all parties to benefit from this form of alternative financing, brokers and agents must suggest and encourage intrafamily loans to first-time buyers.

Re: “More parents finance their kids’ mortgages” from USA Today