Have you gotten to the phase in your life where you are actively concerned about how your adult child will afford a house in this market? If you are a homeowner, you know the power real estate holdings have on net worth, credit access, and financial growth. More importantly, you understand the value of having a home base and the warmth and stability a home provides on a daily basis.
There are several ways for you to help your child embark on the journey of homeownership in the event that they have barriers to entry, and you have the means to assist. I’ll briefly touch on four possible methods you can explore with your financial advisors and adult children to best meet your mutual goals.
Down Payment Assistance
Providing funds to help with the downpayment provides a terrific jumpstart for a first-time home buyer. Ideally, the downpayment should be 20% of the purchase price to avoid private mortgage insurance fees and to secure a more favorable interest rate. It’s imperative to provide a gift letter which outlines to the lender where the funds came from and that there is no need to have it repaid. Also, keep in mind there are limits per year, per parent, on how much can be gifted to someone before federal gift tax comes into play. Always consult your accountant.
Co-signing a Loan
Co-signing is an effective way of allowing a lender to consider your credit history and assets in addition to your child’s, which increases their purchasing power and improves the chance of a loan approval. However, co-signing on a mortgage makes you financially responsible if your son or daughter fail to make payments.
Provide the Mortgage loan
With interest rates escalating, serving as the lender for your child’s loan at an affordable rate might be appealing. Some generous parents might want to provide a loan at 1 or 2 percent but the IRS does have guidelines for intrafamily loans. Regardless, a legally binding document should be drafted, and specific repayment terms must be mutually agreed upon.
According to nationalfamilymortgage.com, another positive aspect of this approach is that loans from parents or grandparents don't involve stringent down payment requirements, credit checks, closing costs and mortgage insurance requirements as loans from a traditional lender do. This means kids can buy a house they might not otherwise qualify for.
Purchase home as a gift
If you are so inclined and able, you can gift your child a home outright as an advance on their inheritance. Presently there are favorable federal tax exclusion on gifts and estates with a nearly $13 million gift tax lifetime exemption before the funds are subject to federal taxation, per parent.
If this all sounds overwhelming, it is. My husband and I have recently explored these options for our own daughter in a highly competitive and expensive housing market. In the event that you are considering going down this road for your child in the Miami real estate market, feel free to reach out. I have a few pitfalls I can advise you on to avoid, and a few noteworthy details to focus on instead.