Financing a home for your retired parents

Lenders are making it easier for people who want to finance homes with rental units for their retirement-age parents.

In the past, banks treated such arrangements as partial investment properties and required higher down payments and loan rates than those required for typical single-family homes.

But that’s not the case anymore.

According to the Pew Center, 20 percent of Americans, or 64 million people, live in multigenerational homes, with at least two adult generations in the home, as opposed to 12 percent in 1980.

Wells Fargo has created a program for Fannie Mae and Freddie Mac loans that reduces the down payment for purchasers of duplexes from 15 to 20 percent to 5 percent. A duplex loan can be issued to up to four borrowers, allowing a couple and their older parents to take the loan out together.

To participate in the program, borrowers must take an online course on serving as a landlord.

Some families look for bigger homes, with bedrooms and bathrooms on the ground floor, for their parents or in-laws. In some cases, the older generation sells a home and applies the equity to the down payment on a new place. Depending on gifting rules, this may require that the older couple serve as co-borrowers on the mortgage loan and as an owner on the title.

When the older co-owners die, especially if they have other heirs, the property may have to be refinanced to turn the parents’ equity into cash. Or the property may have to be sold.

To make such purchases easier, some lenders offer an online calculator to determine how much each party can afford, and to project closing costs and interest rates, along with monthly ownership costs.

If you’re thinking of buying a duplex and renting to your parents, be sure to inform the lender in advance. Many banks offer lower rates and less stringent requirements when family members are the renters.

Be aware that lenders send mortgage-interest statements to each person on a loan, leaving it to borrowers to determine how to divide the interest on their respective tax returns.

In addition, specific tax code rules apply when renting to family members at a discount and can affect landlord-related deductions. Consult a tax advisor or real estate lawyer to determine how to handle any deductions.

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