Prices and interest rates are both going up in our market and that isn’t expected to change in the near future, which is pricing many buyers – especially first-time buyers – out of the market. Rents are also rising at a quick pace, making it a challenge for those deciding whether to rent or buy to know where to turn.
In this article, we will explore ways that buyers can receive help from family (or friends) to get their foot in the door to homeownership and start building wealth through real estate. Of course, while not every buyer has the luxury of a family member who can financially support them, there are more options available to help than many might think.
Here is a rundown of ways – some large and some small – you can support someone getting into the real estate market. I’m writing this from the perspective of a parent helping their adult child, but there are many ways this can be done.
- Gift Money – If you can gift money to help with a down payment, that is a way to help that will have a big impact on a buyer’s purchasing power. In 2022, an individual can gift someone $16,000 and have zero tax implications. Of course, you can always give more, it would just then be subject to taxes. For example, if a young couple was looking to purchase a home, one set of parents could each provide a tax-free gift of $16,000 to each of them, totaling $64,000. If the other set of parents were also willing to contribute, that’s another $64,000, totaling $128,000 in tax-free gifts. Of course, not everyone has this kind of money to contribute to their children. But if you are planning to leave money to them in an inheritance, consider using some of this money now to help your child start building wealth. For gifts, parents will have to sign a gift letter. If you are doing a gift of any size, you will want to consult your tax advisor.
- Buying Down Points – If the monthly mortgage is a concern with rising rates, you could also work with their lender to buy down the interest rate, essentially paying more upfront in order to lower the interest rate so the monthly payments are lower throughout the course of the 30-year loan.
- Buy Together – If you are willing to help but don’t want to gift the money, consider buying the home jointly. If you do this, make sure all parties are clear on the ownership percentage of the home and any future costs. The risk here is that a party might not pay the mortgage, taxes, or insurance.
- Co-Sign the Mortgage – You can help your child qualify for a higher-priced house if you co-sign the mortgage with your child. Both FHA and conventional loans allow the parent to co-sign (as a non-occupant borrower) and still have the loan considered a primary residence as long as the child occupies the home and is on the loan.
- Use your Assets to Allow them to Write a Stronger Offer – In this competitive market sometimes it’s best to come in with a cash offer. A parent could always show their assets and accounts for a “proof of funds” for a “cash” offer, even if the child ends up getting a loan. This is a strategy you would want to talk through carefully with a Realtor and a lender!
- Give a Personal Loan so they can purchase the property in cash, or at a larger down payment, or before they sell their house. Then, once they get a loan through the bank, or sell their house, they can then repay the loan. Personal loans (unlike gifts) have to be revealed to the lender, contain a market interest rate, and be included in the loan-to-value structure and debt-to-income ratio. A silent second mortgage (not recorded against the home) is illegal.
- Buy the Home & Refi – A parent could buy the home for the child, if the child doesn’t qualify on his/her own, and finance the home with a private note. At a later date, they could refinance the parent off the note.
While not all of these strategies will work for everyone, it is important to be creative in markets like this to make homeownership attainable. If you have any questions, please reach out. We would love to help create a custom plan to help you or your family members reach your real estate goals.