Should you help your adult children buy their first home? We’ve heard this question a couple of times from clients and thought it would be a good topic to discuss. With current trends in the real estate market, sometimes this may be a good option where you can help out your kids, and also help your investment portfolio at the same time.
And as we head into the most popular time of the year for engagements and planning to live together, couples may be looking at all of their options and considering asking the bank of their parents for help in getting off on the right foot. As both sides think about how this can work for them, here are some things to also consider.
Parents, Make Sure You Can Afford It
Before you can make a decision on if this is even an option buying a house with your child, you’ll first need to make sure you can afford it. Speak to your financial advisor and ask questions. Speak with your children to determine what they need and when they will need it. What are their expectations? The last thing anyone should do is sacrifice their retirement savings to help their child purchase a house.
If there isn’t extra money set aside for this purpose or it means tapping into the retirement account to help out, you should say no and come up with another way to support your child in the quest for homeownership. After all, homeownership can be delayed but having a retirement shortfall isn’t something easily corrected.
Covering the Down Payment for your Child
One of the most common ways we’ve seen parents help their children purchase a home is by covering the down payment. With most conventional mortgages requiring a 20% down payment, coming up with the $100,000, on a $500,000 home purchase can be tough for all sorts of homebuyers, which is why parents often step in. Parents who go this route often opt to gift the money to their child for tax purposes to get a tax break. There are certain down payment gift rules in Canada, so you will have to prove it is a gift so make sure to make it a real gift and hold on to the proper documentation.
Help Them Save By Covering Expenses
Coming up with $100,000 may seem like a pipe dream but another option to consider is to help your children out with other expenses. This savings can add up quickly and with a long-term strategy, children may be able to come up with that down payment on their own. Let’s say your child wants to purchase a home, and rent and utilities at their current residence cost $2,000 a month. If you agree to cover half of it for two years, that’s $24,000 saved.
You can also eliminate rent altogether by allowing them to move back home. Sure, it will be an adjustment for everyone to live under one roof again but this reduction in cost can help with that savings even faster. This is a very popular trend that we’re seeing today – children moving back home after completing school while working at their first full-time job. Within a few years, savings will add up and a down payment can be realized for their first home.
Buying a House for Your Child to Rent
Becoming a landlord may not have been in your plans but this option may be a way to expand your investment portfolio and help your children at the same time. Many parents can opt to purchase homes for their children and then have them pay rent as a way to help out. In some cases, they are collecting that rent and stashing it for their child to eventually use to buy the home.
Cosigning a Mortgage for Your Child
For some home buyers, it’s not the down payment that is the challenge in purchasing their first home, but rather their credit history that may have been tarnished in the past. If your child can afford the home, has money saved for the down payment but had some credit issues along the way, this may prevent them from getting approved for a mortgage. If that’s the case, a way to help out is to co-sign the mortgage.
This option should only be considered if you have the utmost confidence that your child is going to make the monthly mortgage payments as well as taxes and homeowners’ insurance. If anything is missed, there can be tax implications on cosigning a mortgage and you’ll be on the hook for any missed payments. So consider the benefits of cosigning wisely before buying a house with your child.
Purchasing a home should be an exciting time for everyone involved – parents and their children who are purchasing. But with the trends of the real estate market showing no slowing down, first-time buyers are having to look at unconventional ways of getting into the market. If you’re planning to help out your children, or if you’re planning to ask your parents for help, have an open conversation with them and be honest. No one wants to be put into a bad position, and the decision should really benefit everyone involved.