3 hours ago 1

Family Opportunity Mortgage: What it is and how it works

Maybe your aging parents or adult child would like their own house, but they don’t have the income or down payment to qualify for a mortgage. If you have the means, you can buy a house for them without facing the stringent terms that apply to home loans for second homes or investment properties.

Borrowers who’d like to buy a home for their family have an affordable option with the Family Opportunity Mortgage (FOM). Here’s what you need to know about the FOM, including its requirements, advantages, and disadvantages.

Keep learning: The different types of mortgage loans

In this article:

What is the Family Opportunity Mortgage?
How does the FOM work?
Who is eligible for FOMs?
Pros and cons
Alternatives to FOMs
FAQs

The Family Opportunity Mortgage program lets you purchase a primary residence for an eligible elderly family member or an adult child who is in school, has a disability, or cannot work. Primary residence loans typically have lower interest rates than those for second homes or investment properties. The FOM gives the benefits of a primary residence loan without requiring that you, the owner, live in the house.

Family Opportunity Mortgages work similarly to other primary residence loans, except the owner and occupant are different. The borrower is the property owner responsible for repaying the loan, while the family member is the occupant living in the home. For example, you could own the house while your parent lives in it.

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac insure Family Opportunity Mortgages. These agencies set eligibility requirements that borrowers must meet.

Fannie Mae and Freddie Mac don’t list specific requirements for credit scores, debt-to-income ratios (DTIs), or down payments to get a Family Opportunity Mortgage. However, these GSEs’ standard requirements typically apply to FOMs too.

You’ll need a minimum credit score of 620 and a DTI ratio of 45% or less. You can also get a Family Opportunity Mortgage with a down payment as low as 5%. A mortgage for a second home usually requires a little more for a down payment, and you’ll need at least 15% down for an investment property.

Before applying with Family Opportunity Mortgage lenders, expect to meet the additional requirements below.

Eligible family members: Under FOM guidelines, you can only buy a primary residence for an elderly parent or an adult child with disabilities who cannot independently qualify for a mortgage. You may also buy a home for an adult child who cannot work or is in school.
Sufficient income: As the borrower, you’ll need enough income to cover your living situation and the additional property.

Learn more: How to buy a house, step by step

Support family members: An FOM makes homeownership more accessible to parents or adult children who cannot qualify for a mortgage loan.
Qualify for favorable loan terms: FOMs are primary residence loans that are generally more affordable than mortgages for second homes or investment properties. Typically, the mortgage interest rates are lower, and the eligibility requirements aren’t as strict as with second-home loans or investment property mortgages.
Build home equity: Since you own the home, you’ll build equity as you make the monthly mortgage payments.

Dig deeper: 7 ways to build equity in your home

Requires substantial income: Paying for an additional mortgage on top of your living expenses can strain your finances.
Impacts future borrowing: The FOM adds significant debt, which increases your DTI ratio and could impact your ability to borrow in the future.
Limited to parent-child relationships: Family Opportunity Mortgages are limited to parents or adult children who cannot qualify for a home loan. So, you cannot get a FOM to buy a home for a different relative.

A Family Opportunity Mortgage is not your only option for helping family members own a home. Consider these alternatives.

Cosigning a mortgage could help family members who qualify at least partly for a mortgage. When you cosign, you don’t own the home but are responsible for mortgage payments if the primary borrower cannot pay.

You don’t have to have a parent-child relationship to cosign, which allows you to help family members other than your parent or child.

Dig deeper: Cosigning for a mortgage — The process, risks, and alternatives

A larger down payment can help borrowers with a stable income qualify for a mortgage. The higher the down payment, the lower the loan amount and the smaller the monthly mortgage payment. You may reduce the mortgage to an affordable level for your family member by providing a hefty gift toward their down payment.

Learn more: What to know about using gift money for a down payment

Homeownership assistance programs can include down payment assistance (DPA) or mortgage loans with more lenient eligibility requirements. For example, FHA loans typically have looser credit requirements than conventional loans. FHA borrowers can also take advantage of a lower down payment and closing costs.

Similarly, Fannie Mae and Freddie Mac offer programs for families with lower incomes. You can search for local home-buying assistance programs by visiting the U.S. Department of Housing and Urban Development (HUD) website.

Family Opportunity Mortgage loans are still available, although you won't always see them labeled “Family Opportunity Mortgages.” An FOM is not a separate loan program. It is a primary residence loan with a unique occupancy classification, where the property owner and occupant are different people.

Since Fannie Mae and Freddie Mac insure FOMs, you’ll likely find them with mortgage lenders who offer Fannie Mae and Freddie Mac loan products. Family Opportunity Mortgages aren't always labeled as such. So it’s worth asking a lender if it offers a primary residence mortgage where the borrower is separate from the occupying family member.

Borrowers will apply for a Family Opportunity Mortgage similarly to how they apply for any other primary residence home loan — prequalify, complete the application, and submit all required documentation. When you apply, specify that an eligible family member will live in the home instead of you. Your lender will likely ask you to provide additional documentation showing your relationship with the family member and their inability to qualify for a mortgage on their own.

This article was edited by Laura Grace Tarpley.

Read Entire Article