Buying your first home is a milestone moment — and for many millennials, parents are naturally involved in the process. Not only can parents provide financial guidance and wisdom gleaned from their own home-buying experiences, but a growing number also help their children finance the purchase.
One recent study found 23 percent 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 through purchasing and owning that abode remain timeless — and can provide a vital perspective, clarity and set of criteria that can help guide a process your child may find a bit overwhelming.
Of course, money helps as well: A parent can act as a guarantor on the child’s first mortgage*, so that you are responsible for the loan’s repayment in the event that their child is unable to fund his or her mortgage payments. If you are a guarantor, your name isn’t on the title of the home and the debt may not be considered to be your own — making less of an impact on your personal finances so long as your child makes on-time home payments.
Another way you can offer financial support is to arrange a deferred interest loan for the home’s down payment from your own funds.* These loans are unique in that the child doesn’t need to repay the principal and interest until he or she sells the home. Given that many first-time homebuyers are focused on making their mortgage payment, this can be very helpful. Finally, parents can fund the down payment entirely or become a co-borrower on the child’s first mortgage.
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 in 2017, the IRS may impose tax on gifts of over $14,000 per person; this means you and your spouse may be able to gift your child a total of $28,000 in a calendar year tax-free.**
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 percent from 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 take the time to explain the 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 their 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.