Buying a first home is a milestone moment — and for many millennials, parents are naturally involved in the process. Not only can you provide financial guidance and wisdom gleaned from your own home-buying experiences, but a growing number of parents also help their children finance the purchase.
One recent study found 21% of millennial buyers cited a gift from a relative or friend — typically a parent — as a source of their down payment. For parents who want to support their children’s homeownership aspirations, the key is knowing your options for providing assistance — and tapping expert outside advice when you need it.
Help with money and more
As a parent, one of the best ways you can assist your child during the home-buying process is simply by sharing hard-won financial and real estate advice drawn from your own experiences. The market may have changed since you purchased your first home, but many of the lessons you learned remain timeless — and can provide a vital perspective, clarity and set of criteria to help your child navigate a process that may be overwhelming.
Of course, money helps as well. Parents can act as a guarantors on their children’s first mortgage.1 If you choose this route, you are guaranteeing the debt and this may impact your own ability to borrow. If your child is unable to fund the mortgage payments and defaults, you are responsible for the loan’s repayment. You can alternatively become a co-borrower on your child’s first mortgage. This will leave you liable for the monthly payments to your lender if your child is unable to cover them.
Keep taxes and other ramifications in mind
You want to help your children. That’s a given. But you also want to be sure that the assistance you provide doesn’t adversely affect your own financial situation. If you choose to gift money for a down payment, be aware it will impact gift and estate tax lifetime exemptions.2 Always consult your tax professional before making any gifting decisions.
Also check with your lender to find out if your child’s loan of choice places any restrictions on gifted down payments — some conventional loans allow down payments to be gifted but only if the borrower is putting down at least 5% of their own funds.
If you plan to be a co-borrower, consider your own debt-to-income ratio. As a co-borrower, you’ll take on the debt from your child’s mortgage, even if he or she is paying the bills, which could prevent you from obtaining other loans or financing options in the future.
Take advantage of experts
While your child can benefit from your advice and guidance, consider bringing in experts to outline the details of loan products, review tax ramifications or even evaluate your — or your child’s — personal finances.
Look for a lender willing to take the time to explain various loan options and borrowing processes to your child, even if you already know the drill from your own experience. It’s important that your child has an opportunity to raise his or her own concerns and ask questions. In some cases, you may want to facilitate a conversation with your child and his or her lender to ensure that everyone is on the same page.
Buying a first home is an exciting life moment. By supporting your child throughout the process, you’ll help make an important milestone even more special.
1In certain circumstances, First Republic Bank allows parents to be guarantors on their child’s mortgage or provide their child with a deferred interest loan. Other lenders may not offer these services.
2Some states may also impose a gift tax.