Parents, the New Lenders for First-Time Home Buyers

One in three first-time home buyers received a gift or loan from family for a home purchase made in 2011, according to research by the National Association of Realtors.

More parents are taking on the role as mortgage lenders to help their children take advantage of low home prices and record-low mortgage rates.    

But parents who enter into a gift-giver or mortgage-lender role need to make sure they follow some tax guidelines.

The federal government has rules on how much you are allowed to gift. For 2012, individuals can give up to $13,000 tax-free in one year without having to pay gift taxes. Married couples can give up to $26,000 a year.

Some parents, instead of providing a gift, are acting more as mortgage lenders. They set up an arrangement where they charge interest on the money they lend, but the interest charged must be based on the IRS's "applicable federal rate" minimum for various loan maturities. Still, those rates are even far below today's record-low mortgage rates (anywhere from 0.19 percent or even less for three-year loan terms to 2.63 percent for nine-year loan terms). 

Parents will need to pay income taxes on any interest earned on the loans. Still, the return may be better than what they can get for low-interest CD or money market fund. As for the children, they'll still be able to deduct the interest on their taxes for the mortgage interest deduction if these agreements are formally structured.