Helping Your Adult Child Buy A Home
Posted by Admin Staff on Tuesday, May 10th, 2022 at 4:22pm.
When it comes to purchasing a home, many millennials and Gen Zers have insurmountable worries. When mom and dad were buying their first home, housing prices were significantly lower, lending guidelines weren't as rigid, the cost of living was comparatively better, and the debt to income ratio wasn't large. A 20% down payment was an attainable financial goal in the 70s and 80s - now, not so much. For these reasons, many young people are turning to the Bank of Mom and Dad to turn their real estate dreams into reality. What options are available to you, as the parent of a to-be homeowner?
Can You Afford It?
Anything you contribute in this matter will be significant, so it's important that you consider your finances before making any decision. Consider how any of the below options will affect you when you are no longer working, affecting things like health costs, effects of inflation, rising costs of providing for in-home services, a retirement home facility and/or reno costs of the current home. This isn't cold, hard advice. This merely provides you with a realistic foundation from which to base your decision. Money is a sensitive subject, but approaching it realistically is the quickest and most logical way to make financial decisions.
Option A - Gifting
This is the first option that comes to mind when thinking about your kids. Gifting your adult child with a portion or all of the down payment will certainly solve the issue of funding, and if you have the means to confidently do so without damaging your financial future, by all means - gift away! However, there are some scenarios that you should be aware of.
For example, if your child is moving in with their significant other and they end up splitting/divorcing...that gifted money is part of the home, meaning that it's subject to division. 50% of that gift would go to the ex-spouse. Another outcome to consider is the mindset of the child. Is gifting in their best interest? Will they come to expect this of you? If you have more than one child, will they expect the same gift? These are just some things to consider.
Option B - Loaning
If you have money to contribute, but are wary of straight-out gifting, perhaps loaning is a better option for the both of you. Make an agreement that the money you're providing is to be paid back possibly without interest, in small payments here and there, in larger payments monthly or annually, and/or payable in ten years. Whatever the stipulation(s), this option allows you to help your child while still letting them learn life's lessons and appreciate the value of a dollar.
Option C - Downsizing
If you're at the stage in life where you're thinking of downsizing while your adult child is looking to buy, your move can free up your home's equity to use for your child's needs. Moving from your home into a condo may absolve you of a mortgage payment altogether, freeing up some money to pass along. Again, consider how you would pass this money along.
Option D - Living Back at Home
If a lump sum is out of the question, you can invite them to move back home in order to save money quickly. Letting them rent from you at a reduced cost will help them save money a lot faster than them being out on their own and renting. This could be the break they need in order to enter homeownership. Obviously, you'll have to go over how this option will affect the relationship with your child, and what household rules will change when they begin renting from you.
Option E - Living With Your Child
Alternatively, living with your child/your child's family may be the option for you. Usually, this happens with parents in their advanced years, and/or parents that have lost their spouse. Your money goes towards both your home and your child's home because it's one and the same. It gives your kids the push into homeownership, it gives you peace of mind knowing you're not alone - all while retaining independence for both parties. This will, of course, need to be pondered on. Who will hold the property title? Who is financially responsible for all or certain responsibilities? Who is responsible for care around the home? What are the pros and cons to mixing family with real estate?
Option F - Refinancing
Some people may look into refinancing - tapping into their home’s equity as a way to help their children purchase a home. Particularly in today’s market where home prices have surged, this could be a viable option. However, with interest costs on the rise, this could end up being a detriment to you. Use extreme caution with this option.
Overall, buying a home is an exciting time for anyone. When it comes to helping your child achieve this milestone in life, it's heartwarming (to say the least!). There are options available to you in order to help your child with the process, options dependent on your financial status, your stage in life, the market environment where you live, the market environment where they are looking to buy, their financial status, and their stage in life. Choosing how you help your child will also go towards deciding how your retirement years will unfold, so it's important to be mindful of your choices and decide with intention. Checking with your lender, broker and preferred Realtor about what option works best for you is highly encouraged!