A parent helping an adult child to purchase a home is a very common occurrence. Many factors go in to deciding if this is the right decision for your family. Once a family weighs the pros and cons and makes the decision to proceed, there are a number of ways parents can assist their children.
Is your child responsible and mature enough?
When deciding upon whether to assist your adult child in the purchase of a home, one should carefully evaluate some key factors. It is fundamental to consider your child’s maturity and responsibility level. Has the child paid her/his own rent consistently and managed household bills on her/his own? Does s/he understand the importance of on-going maintenance and upkeep for the house?
How are your finances?
Additionally, it’s necessary to evaluate your own finances. Visiting with your certified financial planner can be helpful for understanding the potential impact. Once you have assessed the current environment of personal finances and responsibility, a discussion about expectations and boundaries on both parts of the party will go a long way to help keep the relationship healthy. Ready to take the leap?
Here are a number of ways to go about assisting a child with a home purchase:
- If the adult child has a credit score, the parents can be non-occupant co-borrowers (aka co-sign). The house would be primary home for the child and thus fetch the best rates. We would take both the parents’ and child’s income and debt into consideration. This can be done for all loans including conventional and jumbo.
- If the child does not have a credit score, the parents can buy the home with the child on the loan and title, but this would be considered an investment property for the parents, as all loan programs require credit scores. For conventional loans, 15% down is the minimum.
- The parents can gift money to the child for down payment and closing costs. Obviously, they’d need to review any taxable events with their friendly CPA or financial advisor, but the lender does not have any restrictions on the size of the gift. Note that we cannot use gift funds for reserves.
- The parents can loan the child money in the form of a 2nd lien. Often done to avoid mortgage insurance, we can do this option up to 95% of the sales price. We simply have to count the 2nd lien payment against the child’s debt ratios.
- More rare but we are seeing this as parents age: the parents and the child buy the house as a primary home for all parties. No gifts needed here, as the parents would be occupying the home with their adult child. This is especially useful in fixed income situations or if the parents receive no income but have plenty of assets.
On a tangent—the exact same scenarios above can be used for people helping their parents buy a home! Though there are restrictive underwriting guidelines, we are seeing this more and more with increase in life expectancy for the aging population. Regardless if it is a parent helping a child or vice versa, one will want to invest the time to analyze and determine the best scenario for everyone’s sake.