How Parents Can Help With Jumbo Mortgages

It’s one thing to ask mom and dad to co-sign a car loan. Getting them to co-sign a jumbo mortgage is a tougher sell all around. The practice is rare, but a few lenders will allow parents to help their adult children qualify for jumbo mortgages, which exceed conforming-loan limits of $417,000 in most places and $625,500 in high-price areas such as San Francisco. A typical scenario: a first-time home buyer whose salary has a strong upward trajectory but who hasn’t been on the job long enough to meet income requirements to buy property in a pricey locale, such as New York, says Ray Rodriguez, regional mortgage sales manager for Cherry Hill, N.J.-based TD Bank, which lends in 15 East Coast states. TD Bank allows parents to co-sign because it feels more secure having an affluent relative share liability on a mortgage, says Mr. Rodriguez. Other lenders, such as Quicken Loans and Citi Mortgage, disallow “non-occupant co-borrowers” as they’re called, because they want the person buying the house to be living in the house. Mathew Carson, a broker with San Francisco-based First Capital Group, says just last month he was unable to find even one lender in the Bay Area that would approve a jumbo mortgage for a father, daughter and son-in-law co-borrowers. Alternatively, because conforming loans allow a non-occupant co-borrower, he has seen clients split the total amount into parts, like a conforming loan with a second mortgage or home-equity line of credit on the parents’ home. Another option: A monetary gift from a parent can be used to increase the down payment and lower the loan amount. John Walsh, CEO of Milford, Conn.-based Total Mortgage Services, which lends in 34 states, offers another strategy. Families could apply for an investment-property mortgage, a loan product that allows non-occupant co-borrowers. Interest rates for these are typically only a half of a percentage point higher than a jumbo mortgage and with a higher down payment, such as 40%, that difference could be as little as just one-eighth of a point, he says. Sometimes, parents will buy a multifamily residence and rent one unit to a child, with rental income from the other units covering mortgage payments, Mr. Walsh adds. Once a property is classified as investment, owners may also benefit from tax deductions for repairs and improvements, says Mary Canning, dean emeritus of Golden Gate University’s School of Taxation and Accounting in San Francisco. When lenders do allow a non-occupant co-borrower, sometimes additional restrictions apply. For example, Bank of America requires that the occupying owner qualify to make the payments solely based on his or her own income. One exception may be for wealthy families with accounts at private banks. These institutions typically have decades-long relationships with their clients, giving them a higher comfort level when a high-net-worth parent wants to co-share a mortgage, says Mike McPartland, head of investment finance, Citi Private Bank North America. Here are some other factors to consider. As always, borrowers should consult a tax accountant or lawyer for specific rules. • Liability. If the child loses a job or for any reason misses monthly mortgage payments, the parent is not only liable for the money owed, but may also end up with a damaged credit score. • Estate issues. If a parent is on the property title as well as on the mortgage (not always required by lenders), pay attention to the ownership status, says Lee Wagner, a partner at White Plains, N.Y.-based real-estate law firm Ziccardi & Rella. “Joint tenants with right of survivorship” means that in the event one of the borrowers dies, the property will transfer directly to the co-owning child/couple. If instead the classification simply is “tenants in common,” the deceased borrowers’ share may be divided among other heirs, such as siblings. In that case, the child co-owner may have to buy out his siblings’ shares or sell the property to settle claims, Mr. Wagner says. • Tax benefits. If annual or lifetime gift exemption limits aren’t exceeded, a bigger tax benefit may come from a parent gifting the mortgage payment amount to the child. This gives the child a double benefit: tax-free money and mortgage-interest deduction, Ms. Canning says.