A 2021 report from the National Association of Realtors found that nearly one-fourth of homebuyers between the ages of 22 and 30 were recipients of cash gifts from family and friends for their down payments. It is sometimes the case that parents aim to help their adult children start the home buying process.
Helping your kids secure the capital to buy a home is a tremendous kindness for parents. However, a few essential considerations will ensure your kids have the best chance of success with their home buying experience.
Before helping your children secure a more financially stable future, you will need to consider several questions, including:
Even if your kids are not quite ready for home buying, there are even options to allow your child to live in a property you own for reduced rent. In a scenario where they can save for the future, it may help prepare them for homeownership down the line. Let's talk about these strategies.
An upfront cash gift is one way to help your child, and it is straightforward. However, you may not want to leave your children feeling indebted, so loaning the money might not be on the table. On the other hand, a gift may provide the feeling of having fewer strings attached.
If they have been saving up for a down payment, maybe you want to provide the difference from where they are to their target 20%. This contribution may help with your child's mortgage rates, which eases the financial strain over the life of the loan.
Any gift amount helps, so there is no pressure to bring them up to 20%. Talking with a professional can help make the most sense of your financial situation while helping your child. Ensuring you have total compliance with tax guidelines is also vital, so a conversation with a tax professional may help with your gift-giving.
Your kids may feel uncomfortable accepting gifts of that magnitude or for home buying. Consequently, having an open and honest conversation about their feelings can be very helpful.
If you have money to help your kids but would like to see that money return later, or if they would be comfortable accepting cash but only if they could return it, then a loan might be a fit for you. You can work with your child to set an interest rate that would be much more favorable than alternative routes but perhaps allow you to see a return higher than average investment or savings yields.
There are still considerations around gift tax implications, and if you decide on a loan of greater than $15,000, it may weigh heavily in the event of an audit. The loan option also fits some parents who can help but need to see the money returned later. This agreement is an opportunity to speak with a professional to ensure your option is best for you and your children and that the details are presented clearly. Ensuring you both understand the full scope of the benefits and responsibility can help make the process smoother overall.
Parents may weigh the option to co-sign on a mortgage. Qualifying on the mortgage might be easier for you. If you are established and have supporting credit, assets, and income, this may not carry as much financial risk to your retirement as other options. Still, there are considerations to be made in case of any defaults on the mortgage. In the case of a default, it could impact your future borrowing power. Since it would count as your asset, it could also affect your eligibility for any future government assistance.
Co-signing helps your children by adding the power of your creditworthiness to the equation. This history may help balance out any deficiencies in your child's credit history to help secure a larger loan. Understanding the responsibilities and expectations of the arrangement are critical to the success of this method. A conversation with your children will help evaluate if they are ready for the responsibility that comes with managing a mortgage.
If your financial standing permits it, you may be considering buying a house outright for your children. But, again, the gift tax comes due, so planning with a professional will allow you to sort out how you will assess a 35% or higher tax.
There is also the option of purchasing the home for your kids and arranging a plan for rent-to-own. In this scenario, you could gift a portion of the property deed annually until the entire homeownership has been transferred onto your child. Finally, leaving a house as an inheritance is also a possibility.
You might even plan for a rent-to-own arrangement or leave home to your kids as part of their inheritance.
Any option you might choose in terms of helping your child with the purchase of your home can be a tremendous advantage. Some adult children might be building more robust savings or are tackling debt. They may also be ready for homeownership and would love the breathing room your help can provide.
Helping to secure financial stability and a place to live should be arranged so that it is to the benefit of you both. For example, children can feel apprehensive about accepting large gifts. Likewise, parents can change the relationship dynamic if they become a landlord to their kids.
Ensure you have talked over your decisions with professionals to ensure you are still on track for retirement. Your child should understand the benefit of the gift they have received and recognize how it can help them secure other financial goals. Keeping plans consistent with your goals is vital to ensuring the full benefits of home buying for you and your adult children.