Proceed with Caution Before Helping Your Kids Buy a Home

Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning

Getting a driver's license. Seeing car insurance rates mercifully decrease. Buying a first home. They're all milestones. If you are like most couples, you have seen your kids reach the first two age-related markers with relative ease. 

It's the last one that's trickier, so you might be inclined to help your adult children, with a down payment on a home.  

Without careful consideration of your finances and that of your adult child, however, problems can arise that have long-term implications for your financial security.

Tough market

According to The Project on Student Debt, in 2013 more than seven in 10 college graduates carried an average student debt of $29,400. And from 2008 to 2012, debt at graduation increased about 6 percent each year. 

Added to that debt is a sluggish job market that promises low starting wages and little job security. Those are some of the reasons, The Wall Street Journal says, that first-time owners are a small share of buyers. Citing National Association of Realtors data, the Journal reports that first-time buyers made up just 29 percent of the existing home sale market in April, which is lower than the average of 35 percent since 2008. 

So with all that in mind, the Journal says, you need to ask - and answer - some tough questions before jumping in with home loan help. How much is your help going to cost you, now and in the future? And is this the right time for a young adult to be buying a home? 

The most important advice for you is this: Don't give up more than you can afford. That means, says Bankrate, that you can meet your own needs now and still maintain for a comfortable retirement that may be not that far down the road.

And if you are lending your child money, The Wall Street Journal warns, you should be prepared for the prospect of never seeing that money back.

Gift or loan?

Another big consideration is whether the help is a gift or a loan.

If it's the former, each parent is allowed to give their child $14,000 per year without it counting against your lifetime gift-tax exemption. If your child is married, the couple could receive $56,000 total without penalty. The advantage of a gift, the Journal says, is that because it doesn't add to the child's debt burden, it shouldn't hurt the child's chances of qualifying for a loan.

However, you need to make sure the gift is given long before your child tries to buy a home because some banks want to make sure the money isn't a loan, which would mess up your child's debt-to-asset ratio.

If the money is a loan, The Washington Times says, get everything in writing and have it checked by an attorney to make sure everything is legal. Included in that document should be the repayment schedule, the interest paid and what the consequences are if the loan isn't repaid.

Because it's a loan, you can't make it a no-interest note or risk running afoul of the IRS, which could consider it a gift instead of a loan - especially if the amount is more than the $14,000 yearly gift allotment.

The Times also says parents should teach their children about having a financial plan, plus the benefits and risks of homeownership. It's important in any arrangement that the child is prepared to live in the home for a long time.

Other options

You could opt to go other routes, says The Washington Times, such as co-signing a loan; having a shared-equity arrangement; setting up a rent-to-own deal; or just lend the entire mortgage amount to your children. 

Co-signing a loan should only be done if parents are confident their child has stable employment and can meet their mortgage obligations. If the child doesn't, the parents could be on the hook for the mortgage payments, which could affect their current standard of living and negatively impact their retirement plans. 

In the rent-to-own, shared equity or whole-loan arrangements, you need to consult an attorney to ensure all the legal contingencies are covered, which can mitigate their risk in the event anything goes wrong.

We hope this information was useful to you and helps you and your family. If you have a specific case or a question, don't hesitate to call our office at 919-443-3035.