Prepare your kids to buy their first home

You don’t want your kids to miss out on today’s housing market opportunities, and everything is different since you bought your house. Here’s a primer on how to position your young adults for their first home loan.

So far I haven’t written a home loan for anyone under age 19, but theoretically an 18-year-old’s signature could be binding on the purchase agreement contract.

Sound loan underwriting decisions have always been based on the three C’s: Credit, capacity, and collateral. Sometimes you also hear about the 4th C being “cash”. Opportunities for 100% financing still exist, and there are programs that allow parents to give a gift for down payment and closing funds, so the “cash” piece can be pretty easy to overcome. If your kid has established their own savings account, so much the better.

We’ve been beating you over the head with the idea that a good credit score is the golden ticket to getting a mortgage approval. There’s a bit more to it than that. Not only does your kid need to have enough credit profile to generate the three credit scores, but those scores need to be based on sufficient data. Some of the first-time buyer loans require the scores be made up of at least three tradelines, each reporting clean for at least one year.

I’m talking to lots of young folks who can’t pass this threshold, so you might encourage your kids to open a credit line or two (or three) now so they can properly “season”. We’re not talking about incurring huge amounts of debt: A $300 credit limit used every six months for $20 then paid in full would do the trick. Some of the local credit unions still offer secured credit limits that might be a good start.

Deferred student loans won’t really accomplish what we’re after, and adding your kids to your credit accounts as an “authorized user” no longer carries the same weight it used to for loan qualification.

Capacity has to do with how much “consistent” income is earned in relation to the house payment plus outstanding debt. We’re looking for a two-year job history, backed up with tax returns. For those recently graduated from school, sometimes six months on the new job works for qualifying. Most of the time, unless it’s a salaried position, we want at least a full year of employ after graduation. And remember, if they’re earning commissions or bonuses, those won’t be counted until two year’s tax filings have occurred.

On the collateral front: Help give your kids a realistic picture of what their first home will be like. Bargain prices don’t always buy a turn-key house, and bank foreclosures sometimes smell bad. Lenders usually require the seller to repair “health and safety” issues, but sometimes an imagination and some elbow grease are needed to turn the first house into their first home.

Have the conversation now so your kids can qualify for The American Dream of home ownership while things are still historically affordable.

Tammy Engel is your local Mortgage Advisor and has helped lots of local families buy their first homes. Contact her at 661/822-REAL with your home loan questions.