Buying a home is typically difficult the first time around. With the increasing amount of student debt building, and the declining number of available jobs, it has become harder for this generation to save to buy a home. If you are a parent interested in helping out your child, here are some things to consider before you jump in.
Educate your child and educate yourself. Be sure your child understands what home ownership really entails. Constant maintenance, monthly and annual expenses, and of course the unexpected issues that tend to pop up. The furnace breaks down, pipes freeze, or a window breaks.
Before you decide to help your child purchase, it is important you understand their financial profile. Do you know how much they earn? How much debt do they have? Do you know their credit score? Understand their financial background to see if they are ready, financially, to take on home ownership. Sitting in with a lender together can help you totally understand your child’s financial profile.
Next, review your financial profile. If you give funds to purchase this home, plan like you will not be getting the money back. Will you still be able to retire how you wish? How much will this financial contribution impact your financial well-being so close to retirement? Will this impact your “rainy day fund”, or other savings?
If you decide to help junior, make sure to have a completely open discussion about what you expect. Are you giving money as a gift, a loan, are you expecting to have influence over the purchase? Discuss everything before you start the process so everyone is on the same page.
As you read this article, understand I am not a tax professional. Consult with one before gifting or loaning your kids any cash to buy a home. Even if you are planning on co-owning, understand all aspects that will impact you before you begin.
One of the easiest ways to help out your kids buy a home would be to give them some cash for the down payment. When you give the cash over, make sure it is documented with a withdrawal slip, a deposit slip and a copy of the cleared check. Also include a letter signed by the parents and children stating this cash is a one-time gift. The lender will want documentation to know the funds are not expected to be repaid. Also the IRS may need documentation of a one-time gift as well, as this can impact lifetime gift tax exemption. This amount gifted can have an impact on an inheritance tax in the future. So, I’ll say it again, talk to your tax professional.
You can loan the dough to your kids too. This will have to be a more professional agreement. Involving a lawyer to draw up a contract. The loan will have to be documented, including payment arrangements, and an interest rate. The interest you collect can be considered as income by the IRS. Also, your child’s lender will have to add this to the amount of debt your child has, and can impact their debt to income ratio. You can be considered a lien holder against the property as well. This method can be right in some situations, but please speak to a tax professional, the lender and a lawyer before you establish the Bank of Mom and Dad.
Some parents are interested in co-signing for the child. Talk to the lender to see how this will impact you if the kids default. Unexpected things tend to happen, a job loss or an illness, sometimes payments are not made. You will need to understand where your responsibility as a co-signer comes in. Keep in mind and ask the lender if you have any ownership in the property, if this is important to you.
As parents we want our kids to be happy and safe. Many of us feel like forking over a down payment is the way to help your kid. Only you will know what is best for your family. Before you commit to helping your kid buy a home, consider all aspects of the transaction. Talk to lenders, lawyers, your financial planners and tax professionals. Make sure you can afford the help and make sure your child is serious about purchasing the home.
For current market information for your Lafayette and West Lafayette communities or a free consultation, contact The Aimee Ness Realty Group Lafayette Indiana. Our team with over 10 years of local experience, has your back to find your dream home, or sell your current home.