The housing market has recently been difficult to access for first-time homebuyers. Coming up with money for a down payment and closing costs is an obstacle for many. Parents often offer or are called upon to help their children in purchasing a home. If you're a parent who's thinking of helping out, you're not alone. According to a recent GfK Custom Research North America survey, 13 percent of parents with children between 20 and 38 years old helped their children to purchase a home in the last five years. Of those, 65 percent helped with the down payment and 24 percent assisted with closing costs. Helping your children to purchase a home is not without its pitfalls, however. Follow these tips to not only assist your children effectively, but also to protect yourself in the process.
Where's the Money?
Before you make promises, examine your own finances. Are you in a position to lend a hand without jeopardizing your own financial well-being? Do you have funds available? The best funding source to help your children to purchase a home is discretionary cash. For example, consider using money that is sitting in a no- or low-interest savings account. Whatever you do, don't be tempted to cash in on your retirement savings, retirement accounts, or IRAs. You won't have time to recoup lost retirement funds before you need them. There may be hefty fines and tax consequences from using retirement money as well.
The real test of deciding whether or not to give your child a specific amount of money is to ask yourself if you have the ability to live a financially secure life without it. If the answer is yes, go for it. If not, don't sacrifice your own welfare.
The Gift that Keeps on Giving
If you contribute money to the purchase of your child’s home, give it as a gift, not as a loan. Provide your child with a gift letter, in which you state that the money is a gift and that you do not expect repayment. Otherwise, it will be considered a loan, potentially making it more difficult for your child to qualify for a mortgage. The federal government regulates the procedure for gift contributions and restricts some types of donor sources. For example, sellers, builders, real estate agents, and brokers are prohibited from gifting money to buyers.
Other Ways to Help
If you don't have cash on hand, there are other ways to help. For example, if your child's income is too low to qualify for a mortgage loan, you can co-sign for the loan and refinance later in the child's name. There are downsides to this type of transaction, however, so use it with caution. The loan will impact your credit, and if your child misses a payment, you will be held financially responsible.
Look into the resources that the government offers for first-time, low-income, or other specific types of borrowers. Nearly every state has some type of program to help with down payments, and many local housing authorities do as well. Some charities offer home buying incentives that contribute matching funds. Check out the latest programs from the Federal Housing Administration and Veterans Affairs.
As a parent, you inevitably want what's best for your child. If you have the means, helping your child to purchase a house is one of the best gifts any parent can give.