“Bank of Mom and Dad” offers solution for millennials to buy a home

The millennial generation, those in the 18 - 34 age range, have been slow to enter the home buying market. Sidelined by student loan debts, high unemployment, and tighter mortgage credit, millennials have a different outlook on home ownership as other generations have in the past.

The homeownership rate of millennials has been decreasing from year to year, according to Marketwatch.

Although the homeownership rate for millennials rose from 34.8% to 35.8% this quarter, it still showed a decline compared to the same quarter in 2014 with 36% of rate. Other comparisons in 2004 the rate reached 43%.

The millennials might find it tough to build the much extra savings so they can have enough cash for the home ownership down payment.

Brian Broderick, partner at Hemenway&Barnes LLP, a Boston legal and fiduciary firm, advised an old approach solution for the problem: intra-family loans, as reported on Forbes.

Broderick said that the millennials may consider the "Bank of Mom and Dad" option only if they are willing to "do it by the book". It includes a professional draft of the loan, whether it is short-term, mid-term, or long-term. It also includes the arrangement  of rates.

According to Investment News, Charles V. Douglas, editor of the National Association of Estate Planners and Councils' Journal of Estate and Tax Planning, said that the parents as the lenders may need an attorney to draft the note and an accountant to make sure they know what is going on.

Intra-family loans can be made below market interest rates. As of July 2015, short term rates for annual lending were 0.48%, mid-term rates were 1.77%, and long-term rates were 2.74%. It may also be the only solution for those who have poor credit history causing by high student debt or low access to credit.

The loans can also be the choice of a second mortgage for the home down payment when the banks are not allowing any institutional outside borrowing. It has the lower closing costs and will keep the interest flow in the family.

But it is advised to not mistake the intra-family loan as a wealth giveaway to the younger generation.

The lenders need to have a promissory note, create a fixed repayment schedule, secure the debt and demand repayment. The family should also keep records that reflect that this is a true loan, the borrowers need to make timely repayments and must remain solvent.

The millennials who involved with intra-family loans should be active and transparent. They should have the initial conversations with the parents before they start missing payments.

As with other family decisions, the intra-family loan should be applied with caution.