It has become apparently harder for the younger generation to purchase their first home. With the interest rates and stress test, and lets not forget the price of homes, entering home ownership isn’t easy. However, there has been a trend over the past couple years – what we call the Bank of Mom and Dad.
There are many reasons why a parent may choose to help their kids flea the nest and become home owners, and this blog is to help you – The Parents – help your kids, if that’s what YOU choose.
“The purchase of a residence is one of the most significant financial milestones in your life. It provides both monetary prosperity and emotional security.”
– Suze Orman
Help With the Down Payment
I would say this is the most common way parents choose to help their kids, because it’s completely subjective to what you want and can afford to give. You have the choice to loan OR gift the money – but this should be determined prior to any transactions or purchases. Have a conversation and lay out your expectations in advance and it doesn’t hurt to get it in writing to protect both of you in the event someone isn’t remembering right.
If you chose to gift the money to your kid a gift letter would be required for the lender, which your Mortgage Professional would provide you. They will want to know where the money came from and the funds are in fact a gift from yourself.
Co-sign the Mortgage
If your kid does not qualify for the mortgage on their own, due to low income and/or credit issues, you may consider co-signing.. This is another great way to help them qualify, however with every financial decision there are risks. It is important to ensure you understand the benefits and risks you are taking by co-singing for the mortgage. Yes you share the liability, but you also share the asset. Co-signing can be for the life of the debt OR you can have an “exit” plan once your kid is able to qualify on their own. Understanding why your kid does not qualify on their own will help you establish an agreement and the steps you both need to take to ensure the success of yourself and your kid. It is important to remember that the mortgage will show up on your credit bureau as a liability, which may affect your credit and/or future borrowing power.
Loan the Money
If you are financially stable enough to loan the purchase price or part of it to your kid this is another way you can help them enter home ownership. You can establish what the payback conditions are, and make it legal by involving a lawyer to represent both you and your kid. The benefit to loaning them the money is you can decide on how much interest to charge. Maybe you decide to offer an interest rate lower than they are able to get from a bank or lender. It’s important to remember that if the money is to be paid back, the lender will require the mortgage applicant to debt service this new loan as a debts in their application.
Utilize the “Refi & Buy” Strategy
If you have a young child or children and are wondering “Will they ever be able to afford to buy a home?”, this strategy may help. Many parents are considering purchasing investment properties now, that they children can either live in and rent during college or university, or that they can sell & gift the money to the children to help get started on adulthood. The value of homes tend to have an upward trend, allowing you to invest now and capitalize on the equity at a later date. Buying an investment property requires a minimum down payment of 20%. If you don’t quite have the cash to purchase a property now, but it’s still something you’re interested in, you can consider using the equity in your current home as a down payment towards the next home.
Final Thoughts
If you have the means and desire to help your kid buy a home there are many ways to do so, just do it smartly. Remember, have the conversations prior to any exchange of money, set out your expectations in writing and have fun shopping for your kids first home.