How to Help Your Adult Children Buy a House
With the price of homes as expensive as they are these days, it can be tough for anyone to get into the housing market. Young adults who are just venturing out of their parents’ homes in hopes of getting a place of their own typically face sky-high real estate prices. And those who are graduating college typically have a huge student debt loan to pay off on top of all other living expenses.
It can be a big challenge to save up enough money for a down payment on a home, let alone all the closing costs associated with buying a house, the furniture needed to outfit the place, and the ongoing operating fees.
Let’s face it: being financially capable of buying a home when moving out of a parent’s home can be a major financial feat.
In many cases, young adults need their parents’ help to secure a home and a mortgage. Doing so can give them a big head start in life. An increase in housing prices and mounting student loan debt can be major obstacles that parents can help overcome.
But how can parents help their grown children buy a home when they’re trying to juggle their own mortgage and daily expenses? Of course, helping adult children buy a house is no simple feat. You’ll definitely want to carefully plan your strategy to assist your kids when they’re ready to fly the coop.
Here are some suggestions to follow to help your kids get into the housing market.
Buy a Home and Let Your Child Rent it From You
Many young adults end up renting when they leave their parents’ homes simply because they do not have the financial resources or credit history to secure or afford a mortgage. But rather than them paying rent to a stranger, they can rent from you instead.
If your current finances permit, consider buying a home for your child in your name and renting it out to them. While this is certainly a huge financial undertaking for you, you may be eligible to deduct your mortgage interest, property taxes, repairs, and certain home improvements come tax time on your “rental” property. Plus, the rent that your child pays you can cover the mortgage.
Buy a Home Together
If your adult child is working and has some level of credit established, consider buying the home together. Two working parties should have an easier time securing a mortgage for a home than a single working individual. If you take this route, you’d each share a certain stake in the home, depending on how you divide the equity.
If at some point, your child is ready to take over the house on their own, you’d sell them the share that you had in it. Just make sure that your child is financially capable of holding up their end of the bargain in terms of paying their share of the mortgage and all other operating expenses.
Co-Sign the Loan
Your adult child might have a steady job and the money to comfortably cover the mortgage as well as a hefty down payment, but that doesn’t necessarily guarantee mortgage approval. Lenders will want to check out their credit history, and if your child doesn’t have any credit built up yet – or has bad credit – it might be tough or even impossible to secure a mortgage.
If that’s the case, you may have the option to co-sign on the loan. In this situation, you would sign your name on the mortgage along with your child’s. As a co-signer, you would be responsible for making the mortgage payments in the event that your child defaults on the loan.
You’ll want to make sure that your child is responsible enough to make the payments on time and in full every month and that you have the finances available in case you ever have to step in to take over the home loan.
Cover Closing Costs
On average, buyers spend about 2% to 5% of the purchase price of their home in closing costs. This can amount to a hefty bill. If you can afford it, consider helping your child come up with the money needed to cover these costs, which typically includes appraisal fees, mortgage application fees, home inspections, homeowner’s insurance, and property taxes.
Give a Down Payment as a Gift
If you have access to cash – or have sources that will allow you to liquidate your money – consider gifting your child the down payment for a new home.
According to the National Association of Realtors, nearly one-quarter of millennials used a monetary gift from their family or friends as part of their down payment.
But giving your child money to cover their down payment is not as clear-cut as handing them a wad of cash. There are rules that need to be followed in order to provide a paper trail proving that the money being provided is indeed a gift to be used towards a down payment and not a loan. Such rules may vary from one lender or mortgage product to the next.
If the money being provided is classified as a loan, your child will have to pay taxes on it. On the other hand, taxes on gift money can be deferred up to $15,000 per child (or $30,000 for couples gifting their adult children). Be sure to speak with a tax specialist to determine whether or not any taxes apply in your situation.
Ideally, the gift should be made at least a couple of months in advance of the mortgage application. There might also be some paperwork to sign verifying that the money is a gift and does not need to be paid back.
The Bottom Line
If you can swing it financially, you’d be doing your adult children a huge favor by helping them out when it comes time to buy their first home. While renting is always an option, buying and owning property comes with its own unique benefits. Getting into the market sooner rather than later can help your children start building equity and can even help them establish strong credit with every mortgage payment they make.
