Helping Your Child Buy a Home
Home ownership is a dream come true for many. However in today’s economic landscape, many young adults are finding it hard to turn that dream into a reality. Whether it’s because of student loan debt, not having enough money for a down payment, or any number of other reasons, many millennials are unable to buy a home on their own. If you’re a parent who is looking for tips to help your child buy a home, then read on.
Giving your child a monetary gift is often the easiest way to help them buy a home. The money can be used for the down payment or for closing costs. But be aware that there are strict rules about how the money needs to be handled. Most lenders prefer to see that gift of money in the child’s bank account at least three months before getting a mortgage. You will also need to supply proof that the money is a gift and not a loan. Keep all the documents related to the gift because you may need them when applying for and closing on the mortgage.
Be the mortgage lender
If you have the cash to invest, then you can be the mortgage lender for your child. However, you will need to formalize and document the loan according to the IRS guidelines. You must also charge them the Applicable Federal Rate. Anything lower than that is considered a gift. Depending on your circumstances, you can finance the entire amount of the purchase price or just a portion. For more information about how to loan money to your child to buy a home, check out this great article from AARP.
Be the landlord
Another way in which you can help your child buy a home is to purchase it yourself and rent it out to your child. This can be a great option for those who still need their money for retirement. You can collect the rent payments and save them. Your child can then eventually use that money to buy the home from you.
Cosign the loan
Some young adults may have the means to buy a home, but their credit history is keeping them from qualifying for a mortgage. In this case you cosign the mortgage for your child. One note of caution – this is only a good option if you trust that your child will make all their payments. Remember – you will be on the hook if your child defaults on the loan in the future.
Improve your child’s credit score
If your child needs a bump to their credit score, then you might also consider adding your child to one or more of your accounts. Your child then becomes an authorized user of your account, and the credit bureaus will link your payment history with their payment history.
Formalize your agreement
Finally, when you’re offering financial assistance to your child, it is in everyone’s best interests to formalize your agreement. This can mean drawing up a contract, documenting gifts, and disclosing the arrangement with other family members. This helps to ensure that everyone understands their responsibilities and obligations before the process begins.
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