From one generation to the next, parents have often helped their offspring purchase a home and realize the American Dream. After all, many millennials can use a hand in the current economic environment characterized by a tough job environment and mounds of student loan debt. According to a recent study conducted by loandDepot, 17% of parents with children age 18 to 35 plan to help them buy a home in the next five years. That’s up from 13% in the previous five years. While buying a house outright for your adult child would be the ultimate gift, many families can’t afford that. But that doesn’t mean they can’t help their child with purchasing a home. From picking up the down payment to being the co-signor on the mortgage, here’s a look at five ways parents can’t help their children realize the goal of home ownership. (Read more, here: A Quick Guide To Buying A Home For Your Child.)
Make Sure You Can Afford It
Before you can make a sound decision on how to help your child or children buy a home you have to first make sure you can afford it. The last thing anyone should do is sacrifice their retirement savings to help their child purchase a house. If there isn’t extra money set aside for this purpose or it means tapping into the retirement account to help out, you should say no and come up with another way to support your child in the quest for homeownership. After all, homeownership can be delayed but having a retirement shortfall isn’t something easily corrected. (Read more, here: How To Protect Retirement And Help Adult Kids.)
Cover The Down Payment
One of the most common ways parents are helping their children to purchase a home is by covering the down payment. With most conventional mortgages requiring a 20% down payment, coming up with the $40,000, on a $200,000 home purchase can be tough for all sorts of homebuyers, which is why parents often step in. loanDepot found in its recent survey that half of the respondents plan to help out by covering some of the down payment with 8% willing to pay 90% or more. Parents who go this route often opt to gift the money to their child for tax purposes to get a tax break. You will have to prove it is a gift so make sure to make it a real gift and hold on to the proper documentation. (Read more, here: What Are Gift Taxes?)
Help Them Save By Covering Expenses
Coming up with $50,000 may seem like a pipe dream but if parents help their children out with other expenses, the savings allocated for purchasing a home can quickly add up. Let’s say your child wants to buy a home and rent and utilities at his or her current residence cost $2,000 a month. If you agree to cover half of it for two years, that’s $24,000 saved. You can also eliminate rent altogether by allowing them to move back home. Sure it will be an adjustment for everyone to live under one roof again but that will reduce your child’s expenses by a lot freeing up more money that can be saved to purchase a home. (Read more, here: Moving Back Home: A Win-Win Situation.)
Buy The Home And Rent It Out
Becoming a landlord may not have been in the plans but it may be a viable way to help your child out and at the same time not part with the money you will need for retirement. Many parents are opting to purchase homes for their children and then have them pay rent as a way to help out. In some cases, they are collecting that rent and stashing it for their child to eventually use to buy the home.
Cosign The Mortgage
For some home buyers, it’s not the down payment that precludes them from purchasing a house, it is their shady credit history. If your child can afford the home, has money saved for the down payment but had some credit hits along the way that will hurt his or her chances of getting approved for a mortgage. In that case, you can help out by co-signing the mortgage for your child. This option should only be done if you have the utmost confidence that your child is going to make the monthly mortgage payments as well as taxes and homeowners insurance. If your child can’t swing it or isn’t responsible and defaults on the loan you will be on tap for it.
The Bottom Line
Buying a home should be affordable for everyone, but that is no longer the case thanks to hefty down payments and stringent lending requirements. For parents who can swing it, there are numerous ways to help your child own a home. Covering the down payment, helping them accelerate their savings rate, buying and renting a home to them and co-signing the mortgage are all viable ways for parents to aid in a home purchase granted they can afford to do it without causing financial strain.