You can play a big part in helping finance your child’s first home purchase
- Gift your child and his/her spouse up to $56,000 tax-free
- Co-sign your child’s mortgage to help them afford a more expensive home
- Save your child thousands in interest payments by offering a family loan
- Share your child’s story on a real estate crowdfunding site
The time has come—your child has finally grown up and is looking to buy a first home. But are they financially prepared to take on the burden of a mortgage? Even if it requires some outside support, it may be worth it to take advantage of today’s historically low interest rates; plenty of parents are doing it. So, here are some common ways parents can help their children in the home buying process.
Gift a down payment
Down payments are often unaffordable for young adults. Closing costs alone can amount to several thousands of dollars. Gifting your child money for their down payment is a tax-efficient way to help them buy a home without depleting their savings.
With the current gift tax exclusion at $14,000 per person, you and your spouse can gift up to $56,000—at least a significant portion of the average down payment—tax-free to your child and their spouse. However, do note that most lenders will require a “gift letter” proving that the money is a gift rather than a loan.
Co-sign a mortgage
Parents concerned about their child not being able to afford to live in a suitable area can help them buy a more expensive home by co-signing their mortgage.
This option has significant financial implications. You are equally responsible for your child’s mortgage, and any missed payments on their part will negatively affect your credit as well. The co-signed mortgage also counts as an outstanding loan on your record, making it potentially more difficult for you to refinance or buy another home in the future. For this reason, your child should refinance their home as soon as they become financially capable of taking on full liability.
Offer a family loan
If you’ve got money to spare, a family loan can be mutually beneficial for you and your child. Given today’s low interest rates, you can earn a better rate of return while your child enjoys a cheaper loan than they can get from the bank.
Keep in mind that tax rules do apply to any interest generated by the loan: you must report it as income (remember, up to $14,000 can be forgiven annually under the gift tax exclusion) while your child can deduct it as mortgage interest.
Help with crowdfunding
Nowadays, you can crowdfund nearly anything. Real estate purchases are certainly no exception. There are several specialty real estate crowdfunding sites that you can use to share your child's story to attract funding. You can even enlist your close family members and friends to lend a helping hand.
The bottom line
There are several ways to help your child buy their first home, and your choice should depend on whatever financial and legal complexities exist in your family. Buying a home is expensive, so it is always advisable to consult with a financial advisor before making a decision.
Read more about home loans, such as the difference between fixed and adjustable-rate mortgages.