As a parent, we experience many proud parental moments. For example, these moments might include when your child graduates from college, or when they obtain that impressive full-time job (and get off your payroll), as well as when they get married and start a family of their own. These moments are part of an evolution that can lead to purchasing a house. However, in the Bay Area, it can be a challenge to see your children get into that first home.
There are a number of ways parents can help their adult children purchase a home in the Bay Area:
- Co-signing the mortgage:
If your adult child’s income is too low to qualify for a mortgage on the home they want, having a parent co-sign the mortgage might help. However, co-signing is a bit of misnomer in this case. Parents really are co-borrowers, and under the lender’s microscope to the same extent: income, credit, current debt load, etc. If the child’s income is sufficient to qualify for the remaining balance on their own in the future, the loan might be refinanced in just their name to relieve the parents of liability. One potential downside for parents is that the mortgage will show up on their credit as an outstanding loan obligation. And if the child misses mortgage payments, that will also impact the parents’ credit.
- Offering a family loan:
Lending money to buy a home avoids any gift tax issue, however you may be subject to other fees and taxes. Consult with your tax person for guidance. One thing to remember with family loans is that it still needs to be at arm’s length, meaning it follows the IRS’s proscribed interest rates based on the term of the loan.
- Adult children move back home
Depending on the parent financial situation, parents’ housing set up and parent-child relationship, a child could move back home and pay rent to the parents. That rent can go into an account specifically for to save as a down payment.
- Gifting a down payment:
This is one of the most common ways to help. Mortgage lenders typically allow borrowers to use money gifted from a family member as a portion of the down payment. However, if it’s a recent gift, the borrowers must be able to prove the origin of those funds and provide a letter affirming that the money is a gift and does not need to be repaid. Also check with your tax person on the maximum gift amount.
As parents we want to help our offspring be successful, however parents need to make sure that their kids can afford the house to be purchased and all of the associated costs in maintaining it. As well, consult with a financial advisor first to make sure you can comfortably afford to help without jeopardizing your own future financial security. You may also want to consult your tax preparer about potential tax implications, and, depending on the circumstances, ask a lawyer how to structure the legal paperwork in case your child divorces a spouse or defaults on the loan.
If you would like for us to put you or your adult children on a listing alert for homes in their price range, email me and I can get you set up!
Denise Myrick-Realtor / Partner