Is Moving In With Parents and Assuming Their Mortgage an Easy Path to Homeownership?

Shifts in the housing market are triggering a lot of changes in the way we live. High interest rates, inflation—which surged back up to 3%, according to the latest consumer price index—and rising home prices are affecting many Americans, making the road to ownership increasingly tricky.

These difficulties have led to a growing interest in multigenerational housing, with a recent report from The National Association of Realtors® revealing that 17% of “homes purchased last year were multi-generational households, the highest proportion since NAR began recording this figure in 2013.”

As the name suggests, multigenerational homes accommodate multiple generations of adults from the same family—be it elderly parents moving in with their grown children, or vice versa.

This can make a lot of financial sense and enable a family to afford a home more easily, particularly when it comes to the younger generations who are struggling to take their first steps onto the property ladder by buying their own property.

But should those children who are moving back in with their parents take it one step further and assume their mortgages?

According to experts, there are several advantages to doing this. However, they also warn that if you are considering taking this step, you should be cautious about the sometimes tricky process and potential downfalls.

How do you assume a mortgage from parents or family members?

First, to assume a mortgage from a family member, you must determine if the mortgage is assumable.

Government-backed loans, such as FHA, USDA, and VA loans, are assumable. Conventional loans rarely are.

Whether you can assume a mortgage from any family member, including your parents, depends on the lender and the loan terms.

Steve Sexton, CEO of Sexton Advisory Group, says that most lenders will allow only immediate family members to assume a mortgage.

“This includes siblings, parents, or children,” he says. To be sure, you should confirm your lender’s mortgage assumption requirements.

Then, if you meet the lender’s mortgage assumption requirements, it will evaluate your creditworthiness by reviewing your credit history and score.

“If you expect to assume a mortgage from a family member, it helps to review your credit report in advance. It is likely you’ll also be asked to verify sufficient income,” he explains.

Does your name have to be on the deed?

CFP Bobbi Rebell, a personal finance expert at BadCredit.org, says your name does not have to appear on the deed initially.

However, she adds that it would make sense to get your name on it so that it will be there if you want to sell the property or refinance if better terms are available.

What are the proper steps?

The process entails numerous steps.

First, of course, you need to reach an understanding and agreement with the family members about the mortgage terms, says CFP and financial planner Mark Reyes.

Then, if the mortgage is assumable, the lender will perform an income and credit verification to ensure the new borrower is financially healthy enough to take on the mortgage.

“Finally, sign any necessary legal documents to assume the mortgage and begin making payments for the mortgage according to the terms,” adds Reyes.

How does this differ from sharing a mortgage with a relative?

Put simply, assuming a mortgage means you take full responsibility for the loan and remove your parents’ liability. On the other hand, sharing a mortgage means both parties are financially responsible for the payments, says Melissa Murphy Pavone, founder of Mindful Financial Partners.

As Reyes further notes, sharing the mortgage might be a better option for some adult children, especially if they’re not financially healthy enough to make the mortgage payment on their own or don’t have a consistent source of income.

What are the downsides of assuming a mortgage?

Assuming a mortgage can be complex, as lenders will scrutinize your finances. Rebell says there would be a credit check, and you will likely have to provide documentation proving your income and assets to show your financial creditworthiness.

Another big drawback is that you’ll inherit the existing loan terms, “which might not be ideal,” says Michael Santiago, chartered retirement planning counselor and senior financial editor at Annuity.org.

And then, of course, specific scenarios can add to the impediments of assuming your parents’ mortgage.

For instance, Cliff Ambrose, a financial adviser and founder of Apex Wealth, recently worked with a client who assumed his aging mother’s mortgage so she could stay in her home while he moved in to help with caregiving.

However, since the mortgage wasn’t officially assumable, he had to refinance it into his name, which required meeting lender qualifications like a new mortgage application.

“His name also had to be added to the deed. This was different from simply sharing the payments—he legally became responsible for the loan, whereas before, he was just helping out informally,” he explains.

One major downside was that his mother lost the lower interest rate she had locked in years ago, and refinancing triggered closing costs, he says.

“But it gave him long-term stability in the home and allowed his mother to stay put without financial strain,” he adds.

Do you have to live at a property you hold the mortgage on?

It depends on the type of mortgage, but generally, the property must be used as a primary residence.

For instance, Rebell says that many government-funded loans, such as FHA loans, might require a homeowner to live in the home for a certain amount of time before renting it out or selling it.

For inheritances, however, there is more leeway, especially if the situation is covered by the so-called Garn-St. Germain Act, she adds.

“While a private mortgage may not be formally assumable, you can own the property because you inherited it and be making the mortgage payments, and if, for example, it was a rental property, you would not be required to live in it,” she says.

“Similarly, if you inherit a home with a private mortgage and you now own it and just keep making the payments, you don’t have to live there.”

Can a child assume the parents’ mortgage after their death?

If the parents pass away, assuming their mortgage is possible, but it depends on the loan terms. Some lenders allow heirs to take over payments under the Garn-St. Germain Act, which protects family transfers, but others require a refinance, says Ambrose.

For this and similar articles, please visit Realtor.com