How to Help Your Grown Kids Become a Homeowner

After graduating, the next task involves hitting the road to find a job. This is what graduates hope to use in order to move out of their parents’ house. It’s also the key to paying off a burdensome student loan. However, this may not be the case for a majority of graduates.

According to a survey done by the National Association of Realtors, 53 percent of potential homeowners below the age of 37 said student debt is the biggest hurdle preventing them from owning a home since they cannot save enough money for a down payment. Other reasons noted include high-interest rates and home prices.

Despite these obstacles, it appears families are willing to chip in in order to help these young buyers own their first home. The same survey reported among the buyers who made down payments, 23 percent of the respondents below 37 used a gift, while 6 percent used a loan extended by friends and family. 

However, this form of assistance doesn’t work for all. First off, the child must qualify for the mortgage, and then the parents can come in and contribute toward the purchase, thus making it more affordable. 

The Basics

While this may look like charity, it’s not, and it’s important to set the record straight for such transactions. This is why financial experts recommend you do the following:

  • Inform other family members about your intentions
  • Don’t discriminate against other siblings
  • Put all agreements on paper
  • Keep a record of all gifts

With formal agreements, you avoid misunderstandings and set define boundaries and obligations. This way, even in the absence of the parents, other siblings can refer to the agreement.

How to Help

Take a look at some of the ways parents can make it easy and affordable for their children to own a home:

1.  Give them Money

Money in the form of a gift always works out well. No strings attached, no contracts, just a simple gift where the parent can write a check to cover the amount needed. Parents can also decide to pay the down payment themselves. 

With this help, new mortgage borrowers can rest easy knowing their monthly payments will be low. 

How it Works

If you decide to use cash gifts to help your kid buy a home, you must know the rules surrounding this form of help. First off, you must know the type of mortgage in question and the lender offering it.

According to financial experts, lenders will want to see some paper trail. This includes bank or wire transfers and traceable checks in your kid’s bank account at least 3 months before they can apply for a mortgage. Further, both you and your kid may need to sign letters to show the money isn’t a monthly installment loan.

Then there is the tax issue. You can give out up to $15,000 in gifts. Either stock or money without having to fill the gift-tax return IRS Form 709. This means as a parent with two kids, you can only give them each up to $15,000 in gifts without filing Form 709. Nevertheless, it’s important to seek a tax professional’s advice on how these rules apply at an individual level before proceeding.

2.  Consider Co-Signing

Acting as a co-signer for the mortgage can be risky for parents but it’s also a route you can consider taking. In fact, according to a real estate data company, ATTOM Data Solutions, co-borrowers formed a quarter of all new mortgage borrowers in 2017’s third quarter.

By co-borrowing, parents help their children overcome credit history limits or lower their debt-to-income ratio.

How it Works

As a co-borrower, you’ll have to apply for the mortgage as well. Therefore, you must meet all credit requirements set out by the lender and sign all loan papers together with your kid during closing.

Both of you can also sign a contract or agreement that outlines the details and expectations, dealing with equity and who gets what amount should the home sell. Also, it can contain details on how to handle a problem if it arises.

If you consider co-borrowing, then you must also deal with the following:

  • Not all mortgages accommodate co-borrowers. Therefore, before diving into a mortgage, make sure it has a co-borrowing option.

  • Since you’re co-borrowing or co-signing, both parties take equal responsibility for the loan including late or missed payments.

  • As a co-signer, it means you have better credit than your kid. Thus, you’re at greater risk should the kid miss or make a late payment. With this in mind, make sure your kid understands what’s at stake and that you’re trusting they’ll be responsible when making payments on time. In addition, make them understand that you’re taking a huge risk so they can own a home.

3.  Finance the Mortgage

This option allows you to become the lender but only if you have the money to invest. This way, you can offer your kid lenient terms such as no down payment and no closing costs.

Instead of the money lying in a money market or savings account where it earns peanuts in interest, consider offering a mortgage at a higher rate but still much lower than the market rate. It’s a win-win situation for both parties.

How it Works

Once you decide to become a loan servicer, find a service which facilitates family loans. One such service is the National Family Mortgage. You’ll only need to pay a one-off fee to setup which varies between $725 and $2,100 depending on the loan. 

You’ll then receive all necessary forms which meet IRS, local, and state requirements. Furthermore, they offer guidance to families when going through settlement and filing, while also connecting borrowers to financiers.

When you decide to become a family lender, you must charge the least fees, also known as the Applicable Federal Rate. This minimal interest rate will differentiate it from a gift.

Final Words

It’s difficult enough to deal with a burdensome student loan, especially with a starting salary. It gets even more difficult to own a home or rent an apartment with many financial responsibilities as a fresh graduate

However, even with turbulence rocking these young home buyers, family can always chip in to help them own their first home. With these three ways, parents can help their children become homeowners.

Keep in mind, you also don’t want the child to turn into an over-dependent kid when you decide to help them out in owning their own home. This you can do by enforcing tough love, which ensures you only provide support only when necessary instead of having an ‘open wallet’ policy, which puts your financial future in jeopardy.