Todays millennial are receiving more help than ever from parents when it comes to making their first home purchase. Even those unable or unwilling to buy a home outright for their child can still help financially and emotionally with the home buying process. From helping your kids establish good credit to teaching them about mortgage options, here are 5 ways you can help your child buy a home when the time is right.
5 ways you can help your child buy a home
1. Let your child live with you temporarily
If a hefty percentage of your child’s pay check goes towards rent, then you can bet it’s going to take a while for them to save up for that down payment. To expedite the money-saving process, we recommend letting your adult child live with you temporarily. Not only will this relieve your child of the financial burden of monthly rental payments, but it will also give them time to get any financial problems in order before attempting a home purchase.
2. Gift the down payment or home buying expenses
Want to help your child financially without paying for the entire home outright? If you have the resources to do so, try gifting part or all of the down payment. Another option is to help financially with other home buying expenses such as closing costs and Realtor fees. Just be aware that when you gift money to a child, it could create problems with a lender. The mortgage gift letter must state that the recipient doesn’t have to repay the giver. By providing the lender with this paperwork, it’s much more likely that your child will be approved for a mortgage.
3. Help your child build a healthy credit history early on
Helping your child establish good credit early on will do wonders for their mortgage application down the line. Without good credit, a bank will be much less likely to loan your child money for a home. Factors that affect your child’s credit score include: credit card payment history; the length of time your child has had a credit card account open; the number of inquiries when applying for credit; and how often credit cards are used. To improve credit, we recommend getting your child a credit card early on and paying all minimums on time. Your child should apply for multiple credit cards, avoid late payments and work to keep all credit card balances low. Any errors should be reported asap. For more information on why establishing good credit is important when applying for a mortgage, check here.
4. Loan them money
Those with the financial assets to do so can loan their child the money needed for a down payment. If you plan to loan your child money for a down payment or other real estate costs, be sure to establish terms and expectations for the loan’s repayment schedule and accrued interest (if any). According to Kiplinger.com, when it comes to charging interest on a loan, it’s required by the IRS that “you charge at least the applicable federal rate (AFR).” Otherwise, your loan may be treated like a gift by the IRS and subject to gift-tax rules, which could mean that you’ll have to file a gift-tax return.
5. Become a co-signer or co-borrower
Is your child overrun with debt? Is their credit history a bit questionable? If so, one option for parents is to apply for the mortgage with the child as either a co-borrower or co-signer. This may increase the chances that the child will be approved for a mortgage. Keep in mind, that while similar, co-borrowers and co-signers aren’t one in the same. If the parents are co-borrowers, they apply for the loan with the child and share mortgage payment responsibilities. Co-signers, on the other hand, only have to repay the loan if the child defaults on a payment and/or isn’t able to pay the rest of the loan.
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