If you want a home loan with the best possible rates and terms, it’s best to structure the property so it can be classified as “owner-occupied.” This essentially means that the borrower will be living in the property as their primary residence. Why does this matter to lenders? Because a borrower is far less likely to default on their primary home than on their second home, vacation home, or investment property.
Think about it. If you have two mortgage payments but, for whatever reason, find yourself able to pay for only one property, which would you make payments on: the roof over your head or the vacation house two hours away? Most people are going to protect the home where they live, and for this reason lenders are more lenient when it comes to owner-occupied homes.
But this creates a problem for people who simply want to purchase a home for their elderly parents. Let’s say your parents are no longer able to support themselves, but you want to ensure their comfort and safety by purchasing a home nearby. If you were to simply take out a mortgage and classify the house as a second home, you would likely find yourself paying higher rates and having less-then-ideal terms.
There is, however, an exception.
Fannie Mae, one of the largest rule-makers in the real estate industry, actually allows you to buy a home as an owner-occupant even if you don’t live in it. With this plan, which is called the Family Mortgage Opportunity, you can actually provide housing for an elderly parent if they are unable to work or simply don’t have the income to qualify for the mortgage on their own.
Buying a Home for an Elderly Parent with Fannie Mae’s Family Mortgage Opportunity
Basically, you can now co-sign on a loan as a second home and there will be no geographical restrictions, meaning the second home can be in the same city and you’ll still get the same rates and terms as if it were an owner-occupied residence.
There is also an option to have your parent not be on the loan at all, which takes the financial risk completely off their shoulders. This can be a tremendous resource for thousands of borrowers across the country that want to provide a clean, spacious, comfortable home for their parents; all without the significant financial burdens of taking out a mortgage on a “second home.”
The Problem with Typical Loans on Second Homes
While owning your home is seen as an important part of overall financial stability (so much so that the government is generally focused on increasing home ownership across all income levels), owning a second home is seen as a luxury. For this reason, the path to ownership through loans is much more restrictive and tends to require more of an initial investment. While the government has programs to assist in the purchase of a primary home, there really isn’t anything to support the purchase of a second home.
This means that people buying a home for their parents and classifying it as a second home will need more money upfront and will generally pay more in interest.
Second home financing, in most cases, is not allowed with loans that will be supported by the federal government. This means that FHA, VA, and USDA loans, which tend to come with easier terms, are completely off limit.
One of the biggest hurdles for financing a second-home is that you will have to bring a 10% down payment in most cases. While 10% may not sound like much, if you want to purchase a $250,000 home for your parents (which is certainly not an outrageous price in many areas), you’ll need to pay $25,000 in a down payment; and that’s not to mention real estate fees, closing costs, and cash reserves. When the home is listed as an owner-occupant, you can get the loan with a much smaller down-payment requirement, sometimes as low as 3.5%; it may even be possible to secure to loan with a smaller down payment, but you’ll obviously need to discuss this with your lending agent before making any decisions.
The interest rates on second homes also tend to be higher. Although the amount that the interest climbs compared to an owner-occupied home may seem minimal, even a quarter of a percentage point can significantly raise the overall cost of the loan. For this reason, it is best to keep interest rates down, especially if you don’t plan on paying off the loan for a couple of decades or thirty years.
One of the most unique restrictions on second mortgages, one that might seem a little strange to buyers, is the geographical restrictions. When you purchase a second home with a mortgage loan, Fannie Mae specifically states that the house must be at least 100 miles from your main residence. This obviously creates significant challenges for borrowers buying a home for an elderly parent, as 100 miles would make the home unreachable in an emergency.
For this and other reasons, buyers may turn to the Family Mortgage Opportunity, which allows for parents to buy homes for their parents without the restrictions and roadblocks of a second-home mortgage loan.
Qualifying for Family Mortgage Opportunity
To qualify for these loans, you’ll have to provide various information to the lender. To start, you personally will have to qualify under the general guidelines for Fannie Mae loans. This can include requirements for your debt loan, debt-to-income ration, credit, and other factors. Of course, the property itself will also have to be eligible, but most single-family homes within a reasonable price range should qualify.
You will also need to provide information that proves the relationship between you and your parents. If your parent earns any income, pay stubs or other verifications may be needed. You may also need your parent’s Social Security award letter, which will help demonstrate your parent’s inability to finance the mortgage on their own.
Let Us Help With Buying a Home for an Elderly Parent
If you have any questions about buying a home for an elderly parent, contact San Diego Purchase Loans today. We’ll help you understand the details of this program so you can make a smart choice for your financial future.
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