Helping Your Adult Child Buy a House
The National Association of Realtors reports that 26% of first-time home buyers received a gift of money toward their purchase. Another 6% received a loan from a family member to buy a home (2014 data). With the ever-increasing cost of homeownership, this trend makes perfect sense. In today’s market, it’s very difficult for a young adult to achieve the American dream. More and more, we see parents helping their adult children buy a home by providing some sort of financial support.
Are you a parent going this route? We are here to help! First, allow us to share a few tips we’ve learned over the years that will make the process smoother for all involved. We will also outline the various ways a parent can provide this financial help – from loans to gifts to co-signing a loan.
FIRST THINGS FIRST
DECIDE WHAT YOUR ROLE IS
From the beginning, you and your son or daughter should decide how you’d like to be involved in the process of finding and purchasing the new home. The options for parental involvement range widely. Ponder the following:
- Do you want to let your child pick the property and just offer financial help?
- Do you want to have approval over his or her final choice?
- Do you want to be actively involved in the search? This could mean receiving the MLS searches and/or attending the showings.
- Do you want to have a say in the writing the offer and terms of the contract?
- Do you want to be involved in the negotiations, home inspection, etc?
It is important to decide up front whose names will be on the sales contract, mortgage and deed. If your name will be on any of these important documents, you will need to play a more active role and be ready to sign paperwork, attend key meetings, and provide financial documents to a lender (if you will be on a loan).
COMMUNICATION IS KEY
First, be sure you both let your Realtor know that you are helping with the purchase. Agents always appreciate knowing who the decision makers (and influencers!) are and their level of involvement.
Once you’ve decided how involved you want to be, tell the Realtor about how much and what sorts of communication you want to receive. Perhaps you want to be very involved and personally see the listings your child is touring. Or at the opposite end of things, maybe you will only want to get involved when the home is chosen or even under contract.
Perhaps most importantly, be sure to let your Realtor know who will be the ultimate decision maker. Who that person is may change depending on the decision to be made (home, price, terms, etc). And that’s fine – just make sure all parties are aware up front.
Keep the lines of communication open. Ask your Realtor to copy you on pertinent emails, conference you in on important phone calls, or join important meetings like the home inspection.
WAYS TO HELP
There are a variety of ways a parent can provide financial support for a son or daughter’s home purchase. The options range in complexity, so be sure to talk to your financial and legal professionals as needed.
MAKE AN OUTRIGHT GIFT
Give a cash gift that your child can use for a down payment or closing costs. This is perhaps the easiest and most straightforward way a parent can help. Putting the cash towards the child’s downpayment is the simplest option and makes the most sense, especially if it will help your child cross the 20% down payment threshold, thereby avoiding the additional expense of private mortgage insurance (PMI).
It is important that the lender who is providing financing be aware of this gift in advance of writing an offer. It should be done as part of the pre-approval process as there may be some requirements that you will need to meet.
You should be aware of the tax implications of making such a gift. Under current tax code, you can give up to $14,000 to each of your children a year without having to pay any gift tax. If you’re married, you and your spouse can both give this amount for a total of $28,000 per child per year.
In order to enjoy the tax benefits of this gift, document it! You will likely have to show it is a gift so be sure to create and keep proper documentation.
A word on gifting: always make sure you can afford to help your child in this way. Do not dip into any retirement accounts to help fund your adult child’s dreams of homeownership. There are many ways to fund buying a home….retirement, not so much!
COVER OTHER EXPENSES
In this scenario, the options are numerous. You could allow your child to live with you rent-free in order to save up money for a down payment. Or you could agree to cover his or her student loans for the first year of the mortgage. Or perhaps you could pay off the remaining balance of a car loan to increase his or her monthly cash flow.
BE THE LANDLORD
If you can afford to, you can purchase the home and have your child rent it out from you, perhaps at a reduced rate. You could then sell the home back to your child when the time is right and there is more financial stability.
PROVIDE A LOAN
Another excellent option is a family loan. Such loans are most often used for the downpayment.
The first question to ask yourself in making such a loan is if earning interest is important — is this loan is an investment or more of a gift?
If earning interest is NOT your goal, you can forgive up to $14,000 in interest per year under gift tax laws ($28,000 if you’re lending as a couple). Otherwise, you, as the lender, have to report interest payments as taxable income, as you would for any other investment. Your child, as the borrower, can deduct mortgage interest as he or she would with a traditional loan.
Again, documentation is key here. Your lender and the IRS will want you to formalize and document the loan.
Keep in mind, if your child cannot secure a loan on his/her own, ask yourself why. If it’s a temporary situation such as a divorce proceeding or job loss, a family loan makes sense. If it’s because of poor spending habits and/or bad credit, think twice about going down this road.
JOINTLY APPLY FOR THE MORTGAGE
Probably the least appealing option (think of it as the last option), is applying jointly with your child for the mortgage. You should ONLY co-sign if you are 100% confident that your child can handle the home’s mortgage payments as well as its taxes and insurance. If not, you would be on the hook for any money owed.
Should you go this route, bear in mind that you will be under the same financial scrutiny as your child, with a lender closely examining your income, credit, and debt.
Down the line, you and your child can refinance the mortgage in just your child’s name to relieve you of this commitment.
THE BOTTOM LINE
When helping your adult child buy a home, communication is key. Ensure that all parties are aware of the ultimate decisionmakers. Let the Realtor know upfront that you will be involved in the purchase — at whatever level of involvement you feel comfortable.
Also, take the time to educate your child on every aspect of the home purchase as well as the financial and tax implications of homeownership. Document everything, especially any loans and gifts! Lastly, be sure to talk to professionals for guidance, especially your financial/tax advisor, Realtor, and attorney.
As always, we are happy to consult with you if you are considering helping your child with his or her home purchase. We can talk through these various options to see what makes most sense for all parties.
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