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06.15.20

How Parents Can Help Their Grown Children Finance and Buy Their Own Home

When the time comes to purchase a first home, questions about financing and down payments are sure to arise. The buyer will be asking how much money should I save to buy a home? Parents often wonder how they can help their grown children pay for a home. And everyone is curious about what’s the best way to go about it.

These are all good questions, but they may not be the right questions. The most important questions to ask and answer first are::

  • Can the buyer afford a home’s monthly payments?
  • Can the buyer afford the process of purchasing a home?

While these questions sound similar, they are very different and directly inform how much a buyer will need to save upfront and how much help they may need from a parent.

Many first-time homebuyers will be able to afford monthly mortgage payments. This is especially true if they happen to live in an urban area with high rent. It’s not uncommon for a mortgage payment to be similar to, and sometimes less than, a monthly rent payment in a downtown apartment. But know this, affording: monthly payments is the easy part.

The tough part for a first-time homebuyer is affording to purchase the home. That’s when the down payment, tax, title, and other closing fees need to be paid. This upfront money will amount to thousands, and sometimes, tens of thousands, of dollars and cannot be financed. This is cash a buyer must have in hand at the closing.

Acquiring upfront money typically begins with the buyer building up their savings. However, it can also come from family members. Getting family assistance is becoming an increasingly common scenario. This is due in part to the increasing price of starter homes and the increasing amount of student debt that first-time buyers are carrying.

How common is it to get assistance? Among homebuyers under the age of 37 that made a down payment, 23% used a gift and 6% used a loan from a family member or friend.

So how does it work? There are a number of methods, options, and advice you should consider. Let’s explore the most common.

Using a Gift to Make a Down Payment on a First Home

The cleanest and easiest way for a family member or friend to help with a down payment is by giving a cash gift. That said, there are still rules, limits and best practices for using a gift for a down payment. There can also be different requirements for using a gift depending on the loan program that will be used. Because of the variables, the buyer will want to work with a personal loan officer to ensure they are going about things the right way.

In most cases, if the buyer is receiving a cash gift to make or help with the down payment, lenders will like to see it as a check, wire transfer or bank transfer. These methods are easy for a lender to trace and verify on their end.

This money should also be placed into the buyer’s account three to four months prior to applying for a mortgage. The lender may also request a letter from the giver declaring that the money is indeed a gift and not a loan that would require repayment.

Who can give a gift? Anyone. Family, friend, boss, whoever wants to help the buyer afford the down payment can give a gift. The only rules that come into play in most cases are the tax implications. As of 2020, anyone can give you a gift up to $15,000 per person without filing a gift-tax return IRS Form 709.

Parents, for example, could give their daughter $15,000, their daughter’s spouse another $15,000 and if the couple has any children, each child could receive $15,000. If the buyer is going to receive a cash gift, we strongly suggest the giver, in this case, the parents, consult with a tax professional to assure the cash gift is complying with current tax lax and guidelines.

Having Parents Finance a First Home Instead of a Bank

If parents have the available cash, another option is to have them finance the buyer’s mortgage instead of turning to a professional lender. That’s right, a mom and dad become the buyer’s bank.

Why do this? Because it can be a financial win for everyone.

The buyer won’t have to go through the loan application process and approval. They should get a much better rate than a lender would offer.

Even when offering you a lower interest rate than a professional lender, parents would earn more on their money than they could have using savings or money market accounts. The downside for parents is that their money is tied up in the home for however long the lending agreement called for, typically 30 years.

Speaking of the lending agreement, we advise using a company such as National Family Mortgage to handle the paperwork. They charge a relatively affordable one-time fee based on the value of the loan amount.

Co-Borrowing With Parents to Purchase a First Home

If the buyer can’t count on mom and dad to fund the home purchase, and few first-time homebuyers could, the buyer could ask their parents to be co-borrowers on the mortgage. Essentially this means that the buyer, their spouse (if they have one) and the parents will all be buying the home together and all have an equity stake.

Co-borrowing is sometimes referred to as cosigning a mortgage. Technically, cosigning and co-borrowing are different. A cosigner guarantees the debt and only takes responsibility or an equity stake if and when the primary borrower defaults. Co-borrowing gives everyone signed on the contract ownership equity right away.

Why would a buyer want to consider using a co-borrower arrangement? Typically they would need a parent’s credit rating or financial resources to qualify for a loan program. When entering into a co-borrower agreement we advise creating a separate document to establish the terms and responsibilities of the co-borrowing arrangement. This will include important items like determining equity and perhaps division of monthly payments.

Entering into a co-borrowing arrangement will impact the parent’s credit score and financial citation so it’s wise to consult with a personal loan officer and perhaps a financial planner before entering into the agreement.

How to Work With Family and Friends When Getting Help as a First-Time Homebuyer

Mixing family, friends, and money can create a volatile situation. Many times the root of the conflict is confusion, misunderstanding or a lack of documentation. No matter how the friends or family decides to help, it’s useful to follow some simple suggestions.

  • Document Everything: Even if it’s a gift, all transfers of money should be treated as a business transaction. Make sure to get a document signed by both the giver and recipient stating the amount of the money involved and any declarations regarding payment terms or its status as a gift.
  • Be Equal: If you’re a parent, don’t play favorites and be transparent about the arrangement. Let everyone in the family know what is happening and be willing to do the same for other members of your immediate family.
  • Use Third-Party Experts: Work with a personal loan officer, lawyers, financial advisors, and other organizations to ensure you understand the scenario and are complying with any and all laws/regulations.

Turn to Family and Professionals for a First Home

Purchasing a home was never easy, but with increasing home prices and student debt, buying a first home today is extra difficult. That’s why a growing number of first-time homebuyers are turning to parents and family members for help.

If a buyer has parents or friends that can and are willing to assist, they should take advantage of it. Owning a home remains one of the best investments a person can make. And the sooner a person can purchase a home, the better the investment often becomes. Whether it’s a gift for the down payment, co-borrowing or something else, start by talking with a personal loan officer. Their advice and expertise will help buyers and parents avoid mistakes, follow regulations and get the best loan program for the situation.

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