With house prices rising across the country, it’s becoming increasingly difficult for many younger people to afford to buy a home. In fact, the sheer amount of cash required for a down payment could take years to save, leaving many stuck in rental properties. Of course, this isn’t ideal and essentially denies the vast majority of younger people the opportunity to invest in their futures.
However, it’s becoming more common for parents to lend a helping hand, and a large number of adult children have been able to get a foot on the property ladder with help from the bank of mom and dad. If you’d like to help your children buy a home, read on to discover your options.
Give a Gift
The most common way parents help their children buy their own homes is to help them with the down payment. To do this, they typically provide a cash gift to cover a portion of the cost. Be aware of the maximum limits, though; if you gift your children too much, you’ll take a sizable tax hit.
To avoid the tax, each parent is allowed to give a maximum of $15,000 to each child – plus an additional $15,000 to their child’s spouse. So, together, two gifting parents can give a total of $60,000 to each child and their spouse. In most U.S. cities, that’s enough to contribute a generous chunk toward the down payment.
If you have the funds to finance your child’s home, you might also consider providing them with a mortgage. As such, you will effectively serve as their mortgage lender and be in a position to offer them far better terms than traditional lenders. For example, you can forgo the down payment or closing costs and charge far less interest. Note that you will still be required to charge at least the applicable federal rate to prevent the assistance from being considered a gift and thus qualifying for taxes.
This can be a win-win situation; you can invest your money in something that pays more interest than a savings account, while still offering a far lower rate plus perks for your child. You’ll get your money back with interest, and they’ll be able to buy a home.
Be Their Landlord
Alternatively, you can buy the home outright and charge your children rent to live there. Again, you can offer an affordable monthly rent that is far more manageable for your kids. Furthermore, many parents stash away the rent to give to their kids so they can buy the home later. However, beware that this method could leave you subject to higher taxes on a second home.
Co-sign the Mortgage
Perhaps your child can afford to buy a home, but they have a patchy credit history. For instance, even something like innocently avoiding credit cards for their entire lives can prevent them from meeting ever-stricter credit criteria. In this case, you can co-sign the mortgage to help them improve their credit rating and enable them to qualify for better terms. However, this is a risky move; if they default on a payment, taxes or other fees, your credit score will be negatively affected – and you’ll have to cover the costs.
Assist with Expenses
Just because you’re a parent doesn’t mean you’ve got thousands of dollars stashed away to help your children buy their own homes. In reality, many parents are unable to give large gifts or buy a second home outright. But, they can still help out by assisting with expenses. For example, you could cover half of the cost of their current rent for a year or two to help them save up for a down payment. Alternatively, you could let them live back home rent-free until they’ve saved up the necessary funds.
Be Sure You Can Afford It
The most important thing, however, is to be sure that you can actually afford to help your children – without getting into financial difficulties yourself. No matter how much you want to lend a hand, it doesn’t do anyone any good if you jeopardize your own financial security. In particular, never dig into your retirement savings as this can have a massive, negative effect later.
When helping your children buy a home, be sure to look after your best interests, as well as theirs; draw up legally binding contracts that dictate the full terms and conditions to protect both of you. Finally, document everything and be transparent with the rest of the family to avoid unnecessary friction.