Are you finding it tough to get into the housing market? You’re not alone. In this article, we’ll look at alternative options to get into the housing market. As we look at each alternative we’ll answer the following questions: What are they? How do they work? Pros and Cons? What to look out for when doing these options?
The Bank Of Mom And Dad
The bank of mom and dad is a term thrown around a lot these days. The bank of mom and dad has been playing an increasingly important role in the housing market in recent years. With higher mortgage rates and a tougher mortgage stress test now in effect, we can expect that trend to continue.
What does the term “the bank of mom and dad” mean exactly? It’s a pretty open-ended term that can mean several things. It’s basically any way that your parents are helping you to get into the housing market sooner.
Living At Home Rent-Free
Your parents could let you live at home rent-free or charge you a below market amount for rent. Doing this enables you to save a down payment that much sooner. This arrangement works best when there are clear expectations and a set timeline. Otherwise, it can lead to disagreements.
You want to be clear about how long you plan to live at home and that your parents are only giving you a break on the rent so that you can save the extra money. It isn’t so that you have extra spending money. That way your parents won’t think you’re taking advantage of them and avoid resentment later on.
Gifting Your Down Payment Funds
If your parents are in a good financial position, they could gift you money towards your down payment. This is another popular trend these days. Your parents could gift you some or all of your down payment. Or your parents could “top up” your down payment so that you can’t avoid paying the mortgage default insurance premiums.
Some parents are willing to go to great lengths to help out their children. For example, use their retirement funds or take out a second mortgage on their home. As an adult child receiving this money, you want to make sure your parents can afford it because some parents will do anything for their children, even if it’s not in their best financial interests.
Having Your Parents Co-Sign
Then there’s co-signing on a home. If your parents can’t afford to gift you the down payment, they could co-sign on a mortgage for you. When they do this, you can use their income to qualify. This helps when your parents are still working and have little to no mortgage left.
If you’re doing this, make sure you have a talk beforehand. Your parents are fully responsible for the mortgage payments if something goes sideways, so you want to make sure you have an understanding ahead of time before you enter this arrangement.
Pros
- The bank of mom and dad can help you get into the housing market that much sooner.
- Banks are okay with everything from parents to grandparents gifting you a down payment or co-signing on a mortgage.
Cons
- You could end up buying a more expensive home than you can afford. This can be problematic, especially with rising interest rates.
- Your parents will probably have a say about which home you end up buying. They may not be willing to gift you money or co-sign a home they don’t like, which can lead to arguments.
Buying With Someone Else
If the bank of mom and dad isn’t an option, you can look at buying with someone else. This can be someone you know, but it doesn’t have to be. The most common option when buying with someone else is buying with a family member. Usually, it’s a sibling – a sister or brother.
Buying with someone else can be a great option, especially when you’re trying to buy in a more expensive housing market like Toronto or Vancouver. Buying a property in those markets can be tough on one income. It can be tough even if you are just buying the most affordable option, a condo.
When you buy with someone else, instead of only one income and one down payment, now you have two incomes and two down payments. That extra income opens up many more possibilities because you can afford to spend twice as much on a property. You might also be able to afford a property type that you weren’t able to on your end. Instead of only a condo, you might be able to afford a townhouse or house now.
Buying with someone else doesn’t have to be a family member, although that’s usually the easiest option (if you get along). It could also be a friend. If you don’t know family or friends who want to buy a property with you, it could even be a complete stranger. Someone your realtor matches you up with, for example.
Pros
- You can spend more on a property without needing to wait to save a bigger down payment.
- You may be able to afford a nicer property, such as a townhouse or house.
Cons
- You might find it tough to agree on the property you want to buy with someone else.
- Make sure you put everything in writing. That way you can minimize disagreements later on when one party wants to sell and the other doesn’t.
Rent-to-own
Rent-to-own is a lot like the typical landlord-tenant relationship, only with the addition of an option to buy the property. With rent-to-own, an agreement is entered into by the landlord and tenant. The agreement stipulates how much of your money is going toward rent and how much is going toward your eventual down payment.
Rent-to-own is basically like forced savings for the renter. It forces the renter to save the down payment, as the landlord typically charges rent that’s above market value. The money that goes towards the down payment is referred to as the rent credit.
Rent-to-own agreements come with different terms and conditions. Sometimes the tenant can buy the property at any point throughout the lease. Other times, the tenant is only able to buy it at the end of the lease.
If circumstances change in the tenant’s life, he usually doesn’t need to move forward with buying the property. However, that can come at a steep cost. The tenant could be giving up all the rent credit if he doesn’t move forward. That’s why both parties should have a lawyer carefully review any rent-to-own agreement, to make sure both parties know what they are signing up for.
Rent-to-own is ideal for a tenant who isn’t quite ready to buy a home yet but will be in the next few months or years. For example, if the tenant needs more time to save their down payment or improve their credit score. That’s when rent-to-own tends to work best.
Pros
- If home prices declined, the landlord comes out ahead, as the tenant is buying the home for more than it’s worth.
- This is a great option for this looking to buy within the next few months or years and like the place you’re renting.
Cons
- If home prices increase, the tenant comes out ahead, as they are getting a good deal on the home.
- The tenant could forfeit the rent credits if he isn’t able to qualify to buy the property at the end of the rent-to-own agreement. This can prove costly.
Final Thoughts
If you’re finding it tough to get into the housing market, you’re not alone. However, as you can see, there’s still hope. It’s a good idea to start by speaking to your parents. If your parents are able to help you out, by co-signing or gifting you down payment money, that’s a good starting point. That not being an option, look into buying with someone else; either a family member or friend. If you can’t find anyone to buy with, that’s when you might consider the rent-to-own option. Just make sure you have a lawyer carefully review the rent-to-own contract before signing, so you know what you’re agreeing to. With each of these options, take the time to work with all the people involved to outline all the expectations of the agreement. Don’t forget to include how any unexpected circumstances will be handled.
If debt is keeping you from achieving your dream of becoming a homeowner the team at Debt.ca can help. Reach out today to find out how.
