If your elderly parents want to move into a new home but can’t obtain financing on their own, you might be able to help through a loan commonly known as the Family Opportunity Mortgage.
The Family Opportunity Mortgage makes it easier for children to purchase or refinance a home for their parents. Here is a look at the loan — what it is, how to obtain one and other options if it isn’t a good fit.
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What Is the Family Opportunity Mortgage?
Usually mortgage interest rates and down payment requirements are higher on a home you aren’t going to live in full time. The Family Opportunity Mortgage allows you to get a mortgage for your elderly parents or disabled adult children as if it were going to be your primary residence, even though it won’t be. This loan makes it much easier for children to get a mortgage for their parents’ own home, as long as they meet certain requirements.
It’s also possible for parents to use the loan program to purchase a home for a disabled child who can’t do so independently, says Bruce Salik, senior vice president of mortgage lending and branch manager at Rate.
“The primary benefit of this type of program is that even if the adult child or parent currently owns a primary residence, the new loan is subject to the same guidelines and rates as an owner-occupied home,” Salik says.
Purchasing a second home often means the buyer has to put up a larger down payment than they would for a primary residence, and the interest rate might be higher. This program allows you to have a down payment as small as 5% and get a low interest rate, says Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors.
“This helps you do something good for your parents,” she says.
[Read: Best Mortgage Refinance Lenders.]
How Can You Qualify for a Family Opportunity Mortgage?
Lenders who offer Family Opportunity Mortgages will follow the requirements set by Fannie Mae and Freddie Mac, government-sponsored enterprises that purchase mortgages to provide more funding to the housing market.
The Family Opportunity Mortgage requirements:
— 620 minimum credit score.
— 45% maximum debt-to-income ratio.
— Steady employment and the ability to support your own housing costs as well as those of the new mortgage.
— The parents or adult child can’t afford the home on their own.
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A lower credit score requires a lower DTI ratio and a higher down payment.
Fannie Mae does not specifically refer to the loans as Family Opportunity Mortgages but does provide guidelines if children want to obtain a mortgage on behalf of their parents: If parents are unable to work or do not have sufficient income to qualify for a mortgage on their own, the children can be considered the owner/occupant. Fannie Mae provides similar guidance if parents or a legal guardian wants to provide housing for a handicapped or disabled adult child. Freddie Mac has similar guidelines.
“The loan can be qualified based solely on the applicant, and the elderly parent or disabled child is not required to be on the mortgage application or title,” Salik says. “The borrower should provide a written statement detailing the intentions regarding the use of the home.”
In both situations, the mortgage applicant needs to have sufficient income, assets and credit to qualify for the loan on behalf of the family member, Salik says. The mortgage would be factored into the borrower’s debt-to-income ratio, which is an important consideration in loan approval.
[Read: Best FHA Loans.]
Family Opportunity Mortgage Benefits
The Family Opportunity Mortgage offers a number of benefits over traditional second-home mortgages.
— The down payment and interest rates are lower. The financial terms for a Family Opportunity Mortgage are often better than the second home or investment home mortgage options. If a lender isn’t familiar with the program, it might request a much larger down payment and price the loan as an investment property, which has a significantly higher interest rate, Salik says.
— There are no occupancy requirements. For second homes, Fannie Mae requires that the borrower occupy the house for some part of the year. There are no such requirements for the Family Opportunity Mortgage.
— There are no distance requirements. Typically, lenders want a second home to be at least 50 miles away from the first. “There are no distance requirements between the adult child’s current primary home and the home they are assisting their parents with,” Salik says. “If the home is on the same street as the child’s primary residence or in another town, the home is still priced and underwritten as a primary residence.”
“Both Fannie Mae and Freddie Mac recognize FOM; therefore, you have the flexibility to choose between the two investors in determining which option is best,” Salik says. “There may be specific factors in the loan that would qualify for Fannie but not Freddie (or vice versa), and this provides you with options.”
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What Are the Alternatives to Getting a Family Opportunity Mortgage?
While the Family Opportunity Mortgage is a good option for many people supporting parents or adult children, it isn’t the only one. Consider these alternatives, too:
— Become a co-borrower or co-signer. Children can become co-borrowers on their parents’ purchase or refinance and specify that they will not live in the home. With co-signing, the children are helping their parents get loan approval with no expectation of living in the home. During underwriting for either co-borrowing or co-signing, the lender will consider the children’s assets and income, Salik says.
— Move to an assisted living facility. Parents might prefer to live in an assisted living facility, which wouldn’t require a mortgage. But they will need to have sufficient income and/or assets to keep up with monthly costs, which average about $4,500 per month nationally according to the National Council on Aging. Many people prefer to “age in place” and would be better off paying lower mortgage or rent payments per month, Evangelou says.
— Get a reverse mortgage. Reverse mortgages allow parents to take advantage of the equity in their current home and use it to pay them money in a lump sum or over many years; the children wouldn’t be involved in this transaction at all.
— Rent to your parents. Children can buy their parents’ home and rent it back to them, or buy a different home and charge rent.
Not all lenders offer Family Opportunity Mortgages, but it’s worth asking about the program as you might be able to reach a financial arrangement that works for everyone.
Reviewed on August 2, 2024: This article was published previously at an earlier date.
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How the Family Opportunity Mortgage Can Help You Buy a Home for Your Elderly Parents originally appeared on usnews.com
