Crazy Buying Idea? Use Parent's Equity in a Bidding War?

I just read this article today on MSN Money talking about millennial's using their parents home equity as a new weapon in a bidding war. Now, before you completely disregard this idea let's think about the implications of this and how it can be a benefit or a detriment to both parties.

They call it a mortgage merry-go-round; parents can refinance their home to fund the cost of their adult child's new home purchase. This makes the kid a desirable all cash buyer in an area where bidding wars are common. Certain micro markets around Nashville have become hot to seller markets and bidding wars are not uncommon. Having all cash buyer and a quick sale makes it a very attractive offer for sellers. But, do parents really do this and how beneficial is it?

Sellers typically prefer cash even though the terms may not be as attractive as a financed offer. Sellers need to weigh all costs and terms when determining which offer to choose. Use the purchase price is above the list price and it can't be appraised for the higher value, a cash offer can be very attractive. A cash offer doesn't need to be at market value because there is no appraisal there's no home loan. Sellers could get more for their home and the kids are now indebted to their parents instead of a lender.

Read More: Top 4 things all buyers wish they knew before buying

Is this a sign of how difficult it is for millennial's to get into the housing market even for a starter home? Starter homes are typically the fiercest competition and bringing in all cash offer on a starter home in any community is extremely attractive.

But what about just a down payment?

Receiving gifts from parents for the down payment on a home is not a new concept. We have seen it for decades and as long as it is not a loan, lenders typically have no issue with borrowers receiving a gift of a down payment or earnest money deposit from parents or really anyone. But we're talking about the entire purchase price of a home here.

This is not going to work for everyone. Parents need to have enough equity in their home to make a refinance worth it. Both parties must be willing to take on the added cost of two new loans. The adult children need to pay their parents back and parents now have a hefty are refinanced alone or two mortgages. Parents can either pull out the equity in their home with a cash-out refinance or get a home equity line of credit, which is a loan against the value of a home.

This works when children you do not clarify for a home loan or they're looking to compete, as we talked about before and bidding wars. Also, parents need to make sure that they are in their house long enough to build up equity and most lenders don't want to refinance within six months of a new loan.

It's very clear that there are a lot of factors involved in this type of situation. One of the biggest may simply be bringing up the topic to parents. Having this conversation could be one of the most awkward parts of the entire transaction but, if it works out for both parties and is a benefit to all, it might be a great way for millennial's or anyone to purchase a house.

Give us a call if you have more questions about this type of loan or purchase in the Louisville real estate market.