What Is a Family Opportunity Mortgage? How It Works, Eligibility, and Benefits

What Is a Family Opportunity Mortgage?

A family opportunity mortgage is a type of conventional home loan that allows individuals to purchase a home for elderly parents or a disabled adult child who would be unable to qualify for a mortgage on their own. Family opportunity mortgages let buyers treat the home as a primary residence for financing purposes, even if they don't plan to live there. While the term "family opportunity mortgage" is no longer in official use, Fannie Mae and Freddie Mac continue to support these loans for eligible buyers.

How Does a Family Opportunity Mortgage Work?

A family opportunity mortgage works like other conventional mortgages used to purchase a primary residence. The application process isn't that different from getting a home loan for a property you plan to live in.

Here's how it typically works.

• Find an eligible property. If you haven't shopped for a property yet, you'll need to consider what type of home is appropriate. Keep in mind that Fannie Mae and Freddie Mac have property requirements you'll need to meet, which we'll cover in the next section.
• Get pre-approved. Mortgage pre-approval can give you an idea of what rates and terms you're likely to qualify for. It's a good idea to obtain pre-approval quotes from at least three lenders for comparison purposes.
• Apply for a mortgage. Once you select a lender, you can complete a mortgage application. You'll need to provide details about the property you want to buy as well as the one you already own if you have a mortgage on it.
• Complete underwriting. During the underwriting process, your lender may ask for documentation to verify your income, employment status, assets, and debts. You'll likely also need to provide proof that the person you're purchasing the home for is unable to qualify for a mortgage based on lack of income or a disability.
• Close the loan. If your loan is approved you'll just need to sign the final paperwork, hand over down payment funds, and pay any required closing costs.

How to Qualify for a Family Opportunity Mortgage

You'll need to meet Fannie Mae/Freddie Mac's conventional mortgage eligibility guidelines to qualify for a family opportunity loan. There are specific rules regarding:

• The types of properties you can purchase
• Who you can purchase the property for
• Credit score and income requirements

Here's more on what you can expect if you're seeking a family opportunity mortgage for a family member.

Eligible Properties

Fannie Mae and Freddie Mac have some basic rules on what types of properties are eligible. Generally, the property must be:

• Residential in nature
• Structurally sound
• Adequately insured
• Accessible by roads
• Equipped with utility services
• Suitable for year-round use

Eligibility Criteria

The Fannie Mae and Freddie Mac guidelines specify two situations in which a family member may secure a home loan on behalf of someone else.

• A parent or legal guardian is purchasing a home on behalf of a disabled or handicapped adult child who is unable to qualify for a mortgage.
• An adult child is obtaining the mortgage to buy a home on behalf of one or both of their elderly parents who cannot qualify for a loan.

There are no age restrictions when buying a home for parents; if buying a home for a child, they must be a legal adult. The parent or the child must use it as their primary residence.

Financial and Credit Requirements

To be eligible for one of these loans under Fannie Mae and Freddie Mac guidelines, borrowers must have:

• A minimum credit score of 620
• Steady employment history and sufficient income to cover mortgage payments for any home loans you have on your primary residence and the new loan you're trying to take out
• A maximum debt-to-income (DTI) ratio of 45%, unless you qualify for an exception

You should be prepared to agree to a hard credit check as part of the application process. You'll also need to provide copies of your bank statements, pay stubs, and tax forms the same way that you would if you were getting a mortgage for yourself.

Other Documentation

You'll also need to be able to demonstrate that the family member you're purchasing the home for is unable to qualify for a home loan by themselves. Your lender may ask for:

• Documentation showing your adult child's disability status, including medical records
• Proof of disability benefits or other government benefits they receive
• Bank statements, pay stubs, or tax forms for your parents

Organizing all of the required paperwork beforehand can save you time when you're ready to apply.

Benefits of a Family Opportunity Mortgage

There are some good reasons to consider a family opportunity mortgage if you want to help a parent or adult child secure housing. Here are the main benefits to know.

Interest Rates

Mortgages for second homes and investment properties typically carry higher interest rates compared to loans for primary residences. A family opportunity mortgage allows you to finance the purchase at the same rates you'd get with an owner-occupied property.

Checking current mortgage rates can give you an idea of what you might pay for a loan, based on your credit score. You can also use a mortgage loan calculator to estimate what the monthly payments might work out to.

Flexible Financing Options

Your lender may allow you to choose from a range of loan terms, or lengths. You can select the financing option that best fits your budget, whether that means a standard 30-year mortgage term or something else.

Again, a mortgage calculator can be helpful for estimating monthly payments. You can see how payments might increase or decrease with different repayment terms.

Low Down Payment Requirement

It's possible to purchase a home using a family opportunity mortgage with a much smaller down payment than you'd need for a second home. For instance, instead of putting 20% or more down, you might qualify for a down payment as low as 5%.

That means less cash you have to pay out of pocket to buy the property. A smaller down payment could be especially helpful if you'd like to keep more cash in reserve to pay for improvements to the property or cover ongoing maintenance costs.

Potential Tax Benefits

The interest you pay on a family opportunity mortgage can be tax-deductible if you itemize your deductions rather than taking the standard deduction. Any property taxes you pay may be deductible, as well.

Your property taxes may also be lower if you're able to qualify for any state or local exemptions.

Occupancy Requirements

As mentioned, with a family opportunity mortgage, you're not required to live in the home. Only the person you buy the property for must use it as their primary residence. In fact, you don't need to live in the same neighborhood, the same city, or even the same state.

Alternatives to a Family Opportunity Mortgage

A family opportunity mortgage may not be your only option. Other possibilities you might consider include:

• Encouraging your parents to get a reverse mortgage if they already own a home
• Co-signing a mortgage on behalf of your parents or adult child
• Rent a home you own to your parent or child
• Consider a move to an assisted or independent living facility

Whether any of these options make sense will depend on the particulars of your situation. If your parents own their home outright, for instance, they might consider using a reverse mortgage to generate supplemental income in retirement. If they don't own a property currently but would like to buy one, they might prefer that you co-sign a loan application so they can qualify for a mortgage.

Independent living facilities can help disabled adults who don't need full-time nursing care maintain some autonomy. However, the cost to you may be high if they don't qualify for any type of financial assistance. Considering the pros and cons of each option can help you choose the best path for your parent or adult child.

The Bottom Line

Family opportunity mortgage loans can help you buy a home for a family member while enjoying some of the financial benefits associated with primary residence mortgage loans. Taking time to shop around and compare mortgage lenders can help you find the best borrowing option for your needs and budget.