Planning to buy a home with a family member?
Buying a house with your parent or adult child can be a great way to ease caregiving, support young children, or simply bring loved ones closer together. And it can make homeownership a lot more affordable.
But the home buying process can be a little more complicated, too.
Here’s what to know about buying, financing, and managing a multigenerational home to make your transition go as smoothly as possible.
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Multigenerational homes are on the rise
Multigenerational living is becoming more popular, especially since the COVID-19 pandemic.
In fact, Than Merrill, founder and CEO of FortuneBuilders.com, says living with an extended family “has become more common today than at any point in history.”
Merrill cites several reasons for the increase in multigenerational housing in the U.S.
“It’s directly correlated to the past decade’s worth of appreciation that has taken place in the United States,” he notes. “Our continuing lack of inventory and pent-up demand for housing has essentially increased prices to a point where alternative measures must be taken to not only find a home but also afford one.”
Merrill points out that choosing to buy a home with your parent or child can help offset the cost of buying as well as ongoing homeownership costs.
But whether you’re buying a home with a parent or child for financial reasons, or simply to enjoy one another’s company, it’s important to know what’s involved.
There are different ways to approach a multigenerational home purchase, and the right one for you depends on your financial situation. Here’s what you should know.
5 ways to purchase a multigenerational home
There are four main strategies that can help you buy a home with a family member:
1. Buy with cash
If you have the cash and want to own your home outright, this is the simplest strategy. One or more parties involved can pool their funds and purchase in one name or multiple names.
“This simply requires all buying parties to wire their agreed-on funds, totaling the purchase price and closing costs, to the escrow company before the close of escrow,” explains Colin Robertson, a Realtor with Coldwell Banker Realty.
“This can be the best option when income is an issue. However, it can be challenging to have liquid assets sufficient enough to purchase what the buyer is looking for in a multigenerational home.”
Buying with cash might be easier if the parent(s), child, or both parties currently own their own home(s). The proceeds from selling an existing property can be used to help purchase the new home with cash.
2. Buy as co-borrowers
Buying as co-borrowers means more than one person is listed on the mortgage application. The credit, income, and assets of anyone listed on the application can be used to help qualify for the home loan.
There are two types of co-borrowers:
- An occupant co-borrower will purchase the home with you and reside in the property as a primary residence
- A non-occupant co-borrower will not live in the property but will assist you in qualifying for and purchasing the property
In the case of a multigenerational home, a parent and child would both be occupant co-borrowers.
This option would require all parties to work with the mortgage lender and provide (for each co-borrower):
- Income and employment information
- Bank and financial statements
- Credit histories
- Information on financial liabilities
“Co-borrowing is best for a family with multiple sources of income. Together, they can qualify for more and potentially purchase a bigger, better house,” Robertson adds.
Note that a co-borrower has a legal obligation to repay the loan if another co-borrower is delinquent. So everyone applying for the mortgage should be comfortable being held responsible for mortgage payments.
In addition, all co-borrowers are considered co-owners and will share in any equity gains.
3. Purchase with a co-signer
Similar to co-borrowing, co-signing can help a multigenerational household qualify for a mortgage.
“However, those who co-sign have no rights to the property itself but will be responsible for making payments if others on the title cannot pay,” cautions Erica Stewart, founder and CEO of Fashion Fair House Interior Design Development & Investment Firm.
Like a co-borrower, a co-signer is legally obligated to repay the loan if the primary borrower is delinquent on monthly payments.
However, a co-signer is not expected to make any loan payments. They serve as a guarantor on the loan without claiming any property ownership.
Also, unlike an occupant co-borrower, a co-signer will not reside in the home. This is why many end up cosigning a mortgage with their parents.
Despite these caveats, multiple family members co-signing a single loan can result in better underwriting.
“With the right credentials, numerous co-signers can simultaneously net a better [mortgage interest rate] and perhaps even a larger home to accommodate everyone,” says Merrill.
4. Have a family member provide gift funds
What if you want to buy with a parent or child, but don’t want both parties on the mortgage application?
In this case, a cash gift might be the right answer. Gifting cash can help your family member qualify for a bigger home loan without making both parent and child legally obligated on the mortgage.
Cash gifts can be bestowed by a family member or partner and applied toward the down payment, closing costs, or financial reserves needed to qualify for a mortgage.
Most lenders will allow you to accept gift funds from a domestic partner, a partner you are engaged to, spouse, child, parent, grandparent, or sibling. But lenders have strict requirements and limitations concerning gift funds.
“If it’s allowed, this option is helpful especially to younger generations who have not had the time or income to save for the necessary down payment,” says Robertson.
“An older family member may be able to help with the purchase while remaining free of the ownership responsibility.”
5. Use a gift of equity
A gift of equity is different from a down payment gift. It involves a transaction where one family member sells their current home to another family member.
For instance, say an adult child wants to buy their parents’ home. The parents can agree to a purchase price below the home’s market value. Then their ‘extra’ home equity — the amount not covered by the purchase price — can act as a down payment for the child.
You can learn more about gifts of equity here.
Loan options when buying a house with parents or children
You can pursue a variety of mortgage loans when buying a house with parents or an adult child. A few of the best options include:
- Fannie Mae HomeReady Loan — The HomeReady loan is ideal for lower-income borrowers. “These are for first-time home buyers whose credit score is at least 620 for fixed rates and 640 for adjustable rates. Fannie Mae HomeReady loans allow you to add additional housemates’ income for approval and provide 3% coverage of closing costs for those who haven’t purchased a home in the last three years,” explains Stewart
- Conforming loans — If income eligibility and down payment are not a concern, a standard conforming loan will likely offer the best interest rate and terms for your home purchase. Buyers with at least 20% down will not have to pay for private mortgage insurance (PMI) and loan terms are flexible
- FHA loans — The FHA allows down payments starting at 3.5% with a 580 or higher credit score. “The FHA also allows borrowers to purchase homes with up to four units so long as the borrower plans to live in at least one of the units,” Stewart says. This could be an affordable option for purchasing a multi-family home where parents and adult children can have their own units but still be in close proximity
- USDA loans — If you want to purchase in a rural area or small town, you may be able to take advantage of a zero-down USDA home loan. A minimum credit score of 640 is typically required, and only a single-family home can be purchased
- VA home loans — If at least one member of the family is a veteran, active-duty service member, or surviving spouse, you may be eligible for a zero-down VA loan
The right loan type will depend on which family member(s) apply for the loan, how strong their personal finances are, how much money they plan to put down, and other factors.
Your loan officer can help you compare mortgage options in depth and find the right financing strategy for your situation.
Talk to a lender about your home buying options (Jul 8th, 2021)How to choose a multigenerational house
Before committing to a multigenerational home purchase, it pays to thoroughly evaluate the amenities and features all parties need and want.
“Multigenerational housing often requires more square footage to accommodate the number of people living under one roof,” Merrill says.
“It’s important to have large, communal areas within a home where everyone may congregate, but it’s also important to award people their own space.”
Bruce Ailion, a real estate attorney and Realtor, says many multigenerational homes nowadays have features uniquely suited to accommodating occupants with different needs. He says these features may include:
- More than one kitchen
- More than one living area
- Multiple levels
- Extra baths
- Two master suites
- Separate entrances
“Occasionally,” says Ailion, “I will work with a multigenerational buyer who constructs a new home and specifically builds these features into their home. Others seek a home with a daylight basement that lends itself to being finished out as a place for another family unit.”
Lastly, think about future needs. For instance, if you anticipate that your family will grow or shrink in the coming years, give thought to how much space will be required down the line.
Make sure you work closely with your real estate agent to find a home that fits your whole family’s needs.
What to consider when buying a house with your parents or child
Many things need to be discussed openly before committing to a multigenerational home purchase and living arrangement. Ask yourself:
- Will this be a long-term or temporary arrangement?
- Whose name(s) will be listed on the home’s title?
- Who will be responsible for mortgage payments (including property taxes and homeowners insurance)?
- Who will be responsible for maintenance and upkeep costs?
- Whose credit and income will be used to qualify for a home loan?
- Will home equity be shared equally?
- How will space in the home be used and shared?
- Who will be responsible for which chores and home maintenance tasks?
- What happens if/when one party wants to move out or sell their ownership stake?
“The main considerations that need to be made concern who is responsible for purchasing and ownership. Legally, the most crucial aspect is agreeing on who owns the home and how it will be passed on,” says Robertson.
“From there, you can determine how payments, equity, and home use will be divided,” he continues.
“Working together and being on the same page with shared goals and needs can determine whether buying a multigenerational home will work or cause problems within the family.”
Planning ahead is crucial
Jonathan Cohen, an attorney with Cohen & Winters, agrees that it’s smart to consider estate planning issues well before committing to a multigenerational home.
“Before signing or purchasing the home, I recommend speaking to an experienced estate planning attorney who can help everyone navigate this potentially confusing and complex situation and decrease the risk of complications later on,” recommends Cohen.
“The best-case scenario is if all parties can agree on the terms before purchasing.”
When it comes to the title, the simplest way to purchase a multigenerational home is to have one person or a married couple on the title.
“But it’s really up to the family and dependent on their unique situation. If a family has the assets and chooses to purchase a home with cash, for instance, they’ll probably need a written agreement that outlines how much each party is contributing and whose name will appear on title,” says Stewart.
Your next steps
In today’s ultra-competitive real estate market, buying a house with a parent or child can help give you an edge. It might increase your credit or income for mortgage qualifying. And it could help you afford a bigger, nicer home.
However, buying a house with multiple parties involved is complicated. So you want to approach this decision carefully.
Make sure all family members are on the same page about ownership, responsibilities, and housing costs. And find the right mortgage loan product to fit your needs.
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