Young-adults in their 20s and 30s are now turning to close friends and family for help in purchasing a new home. Often times, young people have many financial burdens that stand in the way of owning that first home. Significant student loans, a recession that is providing new difficulties in obtaining financially fulfilling jobs, and stricter mortgage underwriting procedures are making it more difficult than ever for young people to buy homes. Homeownership for Americans aged 30 to 34 in 2012 was at a low sitting at 47.9 percent. In contrast, 57.1 percent of Americans born between 1948 and 1957 owned homes by the time they were in the 30 to 34 age range.

One crucial factor that accounts for this vast dip is a new federal 43 percent “maximum debt-to-income ratio” for new mortgage applications. Young would-be buyers hold large student loans put them out of reach for this new standard. These potential buyers are already pre-occupied trying to pay off credit card debt, automotive costs (loans, leases, and regular maintenance), and student debt (usually the most significant burden). These obligations account for an average of 30 percent of current monthly income. If these young buyers were to take on a home mortgage, this would push their debt-to-income-ratio to over 60 percent. Young buyers may need to delay their home purchases until 2019 to remain under the 43 percent maximum. A delay of 5 years is a significant amount of time to pause on such a major life plan as owning your first home. However, Americans in their 20s and 30s have a genuine desire to own a home; they would consider waiting until they had held more financing and purchasing power.

There are some known classic methods to help first-time buyers purchase a home. Close relatives are still helping first-time buyers by putting money forward to help with closing costs and down payments. This is particularly helpful for those young buyers who are in the neighborhood of the 43 percent maximum debt-to-income ratio. This “gift” sum has rules surrounding it that must be met. If the money is actually a loan, it cannot be deemed a gift. To qualify as a gift, a formal gift letter must be drafted stating the following: the intended purpose of the sum, which part of the home transaction the gift is for, where the gift funds are coming from, and a guarantee that the gift giver can deliver on the funds.

A new twist has developed with the family gift-giving practice: family members are loaning the money to their loved ones. This gift-giving practice typically never required repayment. By becoming “mini-lenders”, these family members are helping their young professional buyers by providing that necessary first or second mortgage which can work with their current financial responsibilities. These “mini-loans” provide a return for relatives that exceed returns they could obtain by utilizing money-market funds or bank deposits. One company, National Family Mortgage, has already handled more than “$155 million of intra-family transactions” for 2013 and 2012. More companies like this could emerge to help young professional buyers held back by student loans.

Source: http://www.latimes.com/business/realestate/la-fi-harney-20140216,0,7652846.story