Should You Help Your Child Buy a Home? Here Are Some Options
The real estate market's a tough place for first-time buyers. Young homebuyers often lack the savings for a down payment and tougher lending criteria means that some cannot qualify for a mortgage. Traditionally parents have helped their children mount the property ladder by giving them cash for a down payment. If cash is in short supply, other options include co-signing a home loan or arranging a lease-to-own scenario.
Help With the Down Payment
The simplest way you can help your kids financially is by giving them cash to increase their down payment. A bigger down payment typically means lower interest rates, more deals to choose from and a more lenient lending criteria. Aim for a deposit of at least 20 percent of the home's value. If you're giving your child down payment money, plan on losing that money and not getting it back. Lenders prefer the money to be a gift, because if the parents treat the cash as a loan, it is considered a second mortgage on the property. Keep your dollar advance below the annual gift tax exemption limit, and you shouldn't run into any tax problems.
Buy the Home as an Investment and Have the Kids Pay Rent
Parents own the real estate, which they can sell to their children when their ready, keep as an investment, or sell to someone else. Do the sums before you consider this option. If you need a mortgage, you'll have to come up with a larger down payment than you would for your primary home, typically 30 percent. Like any landlord, you'll have to pay the mortgage regardless of whether your tenant pays the monthly rent. Moreover, this approach may be great for you but it doesn't do much for your kids. They don't get a stake in the house and they're not really building up any responsibility.
A lease-to-own arrangement is also known as a land contract or purchase installment contract. Under this arrangement, you essentially act as your child's mortgagee. You buy the home and give your child immediate possession, and he or she pays you the purchase price in agreed installments. When they've paid you back in full, the home is theirs. A lease-to-own arrangement requires specialist tax advice and must include a written contract.
Co-Sign the Loan
If your child has a low income, low credit score or a poor credit history, co-signing their mortgage may get them past otherwise prohibitive lending criteria. This isn't for everyone though. If your child doesn't make his or her mortgage repayments, the bank will come to you. You'll have to be able to afford any outstanding mortgage on your own home, as well as your child's mortgage payments if they can't or won't pay. Making good your child's delinquency may have a devastating effect on your credit and cash flow, so if your child cannot get a loan in his or her own right, ask yourself why before you agree to co-sign the loan. If they're in a starter job and simply haven't had the time or the income to establish a credit profile, they may be worth the risk. If they can't get a loan because they have a history of credit card defaults and late bill payments, the chances are they'll default on this loan too.
Two or more incomes increases your child's buying power, but you take on 100 percent liability for the loan. If he or she misses a payment, the lender may ask you to make good the default. There may be tax implications too, especially if the property isn't your main home. On the plus side, you'll both own a stake in the house. You can agree to split any capital appreciation in whatever percentage you choose, if the home is later sold.