It’s always a mixed bag of emotions when your child buys their first home. They’re flying the nest for good, no longer dependent on your kind-heartedness.
No more making them breakfast or just having them lounge around the home like back in their teenage days. I personally can attest to how nice it was having my youngest son return home during breaks at school.
Memories aside, it has become increasingly harder for first-time homebuyers to actually buy that first home.
With a volatile stock market and increasingly unstable interest rates, home prices are going up, and mortgages are getting harder to obtain. Maybe you’re wondering how you, as a parent, can help your child buy their first home. Well, luckily for you, this article will give you a few tips and pointers.
I recommend figuring out in advance just how much you can afford to help your children. Of course, you care about them, that isn’t in doubt, but you do have to keep yourself in mind too. You may have retirement savings or expenses of your own. Don’t compromise your financial situation just to help out your child; otherwise, you’ll both be worse off for it.
Co-Sign a Loan
Some houses in certain areas can be incredibly expensive, and sometimes mortgage brokers and banks aren’t willing to give out sizeable mortgages to first-time buyers. This is understandable, of course, since the risk is so high.
Your child could get one of these larger loans if you’re willing to co-sign for it. Of course, if you do co-sign, you will become responsible for the house debt if your child defaults or fails in repayment of the loan.
Even if your child is paying off this debt with no problems at all, it is still down on your credit report, so if you need to take out finance on anything, you may not be accepted due to such a big financial commitment you may have to take on if anything goes wrong with your child’s loan.
If your child and their partner (if they have one) have a solid income stream, then you should have nothing to worry about. They’ll be able to make repayments on time, and you should never actually have to pay a cent towards their home.
On the flip side, if your child and their partner’s income is inconsistent or they know they’ll struggle to make repayments, then other options should be considered, or a cheaper house should be pursued.
I can’t stress enough how big of a commitment this is for your own finances. I have seen plenty of parents have to start paying student loans due to a child’s job loss or just unforeseen circumstances. So, before you sign, make sure you can pay the bill if you need to.
Gift the Downpayment
You can legally gift up to $30,000 each year to each one of your children without having to file a gift tax return. This is per person and not per household, so you and your husband or wife could give 2 separate payments of $30,000 to make $60,000 for your child or children.
If this downpayment is still too low, then you could game the system (legally) and gift $60,000 in December and then $60,000 in January for a total of $120,000.
Gifting a downpayment is a great option if your child can afford monthly repayments on a mortgage but can’t scrape up enough money for the initial downpayment on the home they would like to buy.
Private Loan
You can actually set up your own loan system for your children. As long as you set your interest rate at or above the Applicable Federal Rate, then this loan will function like you’d expect a typical loan would.
A private loan with an interest rate at the minimum Applicable Federal Rate is often more favorable than even some of the best bank loans out there.
As you are the one providing the loan, it is at your discretion to forgive interest payments rather than defaulting as would happen with a bank loan. Private loans just offer a great deal of flexibility you wouldn’t get with a typical loan.
Of course, you need to give the money up front, so this requires a level of pre-existing wealth that is liquid. This is a good option if you want to help your child get a home, but you want something in return for providing this help.
Conclusion
Even though the current economy is rather uncertain, there are still ways to help your child get their first home. It just depends on how much you’re willing to give and what your financial situation is.
Everybody wants to help their children in any way they can, but it’s not always realistic. The options described above are by no means exhaustive, and there are still plenty of other options out there to help with down payments on your children’s homes.
We hope this article was informative and has given you a good starting point on considering the range of options you have in front of you. I wish you and your child the best of luck!
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