First-time home buyers already burdened by debt often need help to qualify for mortgages

February 12

Parents, grandparents and young adults know the problem only too well: Heavy student-debt loads, persistent employment troubles stemming from the recession and newly toughened mortgage underwriting standards are all standing in the way of potential first-time home buyers in their 20s and 30s.

But are there effective techniques that family members, friends, even employers can use to bridge the generation gap by offering a helping hand — without hurting their own finances in the process? You bet.

First, some sobering numbers:

●Citing Census Bureau data on homeownership by age, demographer Chris Porter of John Burns Real Estate Consulting calculates that Americans who were 30 to 34 years old in 2012 — those born between 1978 and 1982 — had the lowest homeownership rate of any similarly aged group in recent decades, 47.9 percent. By contrast, Americans born between 1948 and 1957 had a 57.1 percent ownership rate by the time they hit the 30-to-34 age bracket. The figure for 2012 comes despite record low mortgage rates and bumper crops of bargain-priced foreclosures and short sales.

●Debt-to-income ratios increasingly are mortgage-application killers for would-be first-timers. The new federal 43 percent maximum debt-to-income ratio for “qualified mortgages,” a standard that was adopted nationwide last month, is particularly poorly timed for young purchasers. Because of large student debts, which average $21,402 but sometimes balloon into six figures, they may not be able to meet the standard for years.

Typically they’re already paying out large amounts on credit cards, auto loans or leases and student debt — about 30 percent of current monthly income for those age 21 to 30 as of 2012, according to a new report from research economist Gay Cororaton of the National Association of Realtors. Factoring in the cost of a typical mortgage for an entry-level purchase, the debt-to-income ratio as of 2012 for these individuals exceeded 60 percent, Cororaton estimates. Even with a 5 percent increase in income per year, they would not be able to qualify under the 43 percent debt-to-income test until 2019.

That’s a long time to postpone a purchase. Yet consumer research consistently finds that the overwhelming majority of Americans in their 20s and 30s would like to own a home, once they’re able to put together the financial pieces to make it feasible.

So what are some of the solutions available to help bridge the gap? The most popular is also the oldest: Growing numbers of relatives are stepping in with gift money to help defray the down payment and the closing costs; 27 percent of first-time purchasers received such assistance last year, according to one industry estimate. Down-payment gifts do not address the problem of the debt-to-income ratio, but for young buyers who can get close to the 43 percent mark for conventional loans (Fannie Mae and Freddie Mac) — that number is slightly higher for the more flexible FHA and VA mortgages — they can be extremely important.

Rules on gifts vary among funding sources, but there are some shared basics: The money cannot be disguised as a gift if it is actually a loan; there needs to a formal gift letter that spells out the purpose of the gift and the specific transaction for which it is to be used; the source of the funds and the capacity of the gift-giver to provide the money need to be documented. For down-payment help outside the family tree, check out www.downpaymentresource.com.

An increasingly important and fast-growing resource is turning the gift concept on its head: Rather than simply handing over their cash with no repayment arrangements, family members are becoming mini-lenders themselves. With a little professional assistance, they are providing either second mortgages or first mortgages that are custom-designed to deal with whatever financial hurdles — including paying off student loans to reduce debt-to-income ratios — their young relatives are confronting. Properly structured, these loans provide annual returns to family members well in excess of money-market funds or bank deposits, and open the door to homeownership for their kin.

The largest player in the field, National Family Mortgage (www.nationalfamilymortgage.com), has structured and serviced more than $155 million worth of intra-family transactions in the past two years and is on track, according to founder and chief executive Tim Burke, to do $150 million in volume during 2014. “There is a lot going on” in this field that can help entry-level buyers strapped with student-loan debt, Burke says.

Check it out.

Ken Harney’s e-mail address is kenharney@earthlink.net.

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