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4 Ways Parents Can Help a Child Buy a Home


The path to homeownership can be daunting, particularly for first-time buyers. If you’re able, you may consider helping your children buy their first homes. From gifting money for a down payment to buying a home and acting as a lender to your child, there are many strategies that parents can consider. Each method carries its own set of financial and legal implications, including potential tax consequences, which require careful examination. Moreover, it’s essential to consider the broader impact of such assistance on the parents’ financial stability, relationships among siblings and other long-term obligations.

A financial advisor can help you plan around a large financial gift and find a way to help your child purchase a home. Connect with a fiduciary advisor today.

1. Give Them Cash

There are various methods parents can use to financially support their children’s homeownership ambitions, but monetary gifting is perhaps the most straightforward.

This strategy is especially useful when the child has a stable income but lacks the necessary savings for a down payment. Parents can use a significant monetary gift to fill this financial gap. A well-structured and executed monetary gift can extend a much-needed helping hand to a child aspiring to buy a home and concurrently provide financial relief to parents by reducing their taxable estate. However, you should note that while monetary gifts can prove advantageous, you should carefully consider the tax implications to avoid future financial complications.

Gift Tax Implications

The federal gift tax ranges from 18% to 40%, and is imposed on the donor – the person giving the gift. However, not every gift incurs this tax. The IRS allows you to give up to $18,000 per recipient in 2024. This means a parent could give each of their three children up to $18,000 without triggering the gift tax.

Keep in mind that gifts that exceed this annual exclusion don’t automatically incur the gift tax. The IRS also gives you a lifetime exemption worth up to $13.61 million in 2024. Gifts that exceed the annual exclusion simply reduce your lifetime exemption. The gift tax comes into play only when your lifetime exemption is exhausted.

To distinguish between the annual exclusion and the lifetime exemption, consider this example: A parent gifts $500,000 to their child in 2024 for a home purchase, which is beyond the annual exclusion limit of $18,000. However, they can use their lifetime exemption to shield the gift from taxes. After the gift, they would still have $13.11 million remaining in their lifetime exemption.

Also remember that each person has a lifetime exemption, meaning a married couple has a combined lifetime cap of $27.22 million.

2. Buy the Home and Offer a Favorable Mortgage

A man shares a laugh with his son after agreeing to help him buy his first home.

Rather than giving your child cash for a home purchase, you could buy a home and play the role of lender. In essence, parents act as the bank, extending a loan to their child to purchase a property, typically under more favorable terms than what a traditional lender might offer. This setup can prove advantageous, potentially allowing the child to secure the home without the need for a traditional mortgage and saving them a significant amount in interest over the loan’s lifespan.

As an example, parents could offer a 4% interest rate at a time when the average market rate is 7%, leading to substantial savings over the life of the loan for their child. Benefits of such an arrangement could also include flexible payment plans for the child and potential tax advantages for the parent(s).

In another example, a couple could purchase a $200,000 home for their daughter. They offer her a 3% interest rate, significantly lower than the average market rate of 4%, and establish a 30-year mortgage term. This allows the daughter to make affordable monthly payments.

Over the mortgage’s lifespan, the daughter would save nearly $42,000 in interest when compared with a traditional bank loan. The parents, meanwhile, earn a steady return on their money, while also helping their daughter establish a credit history and equity in the home.

But what does setting up a private mortgage entail? First, parents must purchase the home outright or make a significant down payment. They then extend a loan to their child to cover the property’s cost. This loan can take various forms like offering a lower-than-market interest rate, waiving the down payment or permitting interest-only payments for a set period.

Risks of Acting as the Bank

This arrangement carries legal and financial implications. To establish a private mortgage, parents must enlist a lawyer to draft a promissory note and a deed of trust, and then record the mortgage with the local county recorder’s office. They may also need to involve an accountant to tackle potential tax implications.

For example, if the interest rate they offer is too low, the IRS might view the loan as a gift and impose the gift tax. Similarly, waiving the down payment could potentially lead to gift tax implications. Therefore, it’s crucial to seek professional advice to understand all potential risks and tax implications.

3. Buy the Home and Rent It to Them

Some parents may consider purchasing a home and renting it to their children. This scenario often arises when the younger generation faces difficulty in acquiring a home due to factors like high property prices, inadequate credit history or insufficient savings for a down payment.

This strategy allows parents to offer tangible financial support while also gradually familiarizing their children with the responsibilities attached to homeownership. As time progresses, parents may desire to transition ownership of the property to the child. Ownership could be stipulated in the parents’ will, passed on as a gift or sold to the child.

Risks of Buy-and-Rent

While there are many advantages to this approach, such as financial support for the child and possible tax deductions for the parents, potential drawbacks exist. These might include the financial risk for the parents if the child fails to pay rent or potential strain on the parent-child relationship due to the landlord-tenant dynamic.

A comprehensive lease agreement, like a traditional lease, would stipulate the terms and conditions of the child’s tenancy. However, it may also include unique terms like a rent-to-own agreement or specific clauses about future property ownership transfer, reflecting the familial relationship.

4. Cosign the Mortgage

A man looks online at properties to purchase with the help of his father.

Cosigning is a legal agreement where a third party guarantees to shoulder the responsibility of mortgage debt should the borrower fail to meet their obligations. For instance, if a parent agrees to cosign a $300,000 mortgage for their child and the child defaults, the parent will be legally obligated to repay the remaining debt. This can be a substantial burden, especially if the primary borrower has made few payments or the property has depreciated. It is a significant decision, one that requires a thorough understanding of its implications before proceeding.

Cosigning a mortgage can have several potential benefits, not only for the primary borrower but also for the cosigner. For example, a cosigner can help a loved one secure a home, which is an emotionally rewarding experience. Furthermore, if the primary borrower consistently makes payments, it can positively affect the cosigner’s credit score.

Risks of Cosigning

However, it’s critical to also understand the potential risks and pitfalls. Cosigning a mortgage can adversely impact the cosigner’s credit score, particularly if the primary borrower misses payments or defaults on the loan. This could affect the cosigner’s future borrowing capabilities.

Moreover, in the worst-case scenario where the primary borrower defaults on the loan, the cosigner could be held legally responsible for the entire remaining debt. This could pose a significant financial burden and could even lead to financial instability for the cosigner.

Other Considerations When Helping With a Mortgage

Before choosing to support a child’s dream of homeownership, parents must first take a close look at their financial standing. This is a necessary step to ensure that their generosity does not unintentionally compromise their financial stability. Parents could potentially deplete their retirement savings, accumulate more debt, or face potential legal issues in the instance of a child’s divorce or bankruptcy.

For example, parents might unknowingly threaten their retirement savings by withdrawing from or borrowing against these funds. Furthermore, co-signing a loan can result in increased debt and potential credit score implications for the parents if the child is unable to meet their mortgage payments.

Furthermore, consulting with a financial expert can provide valuable insights and advice on how to balance these obligations while helping your child achieve their homeownership dreams.

It’s also important to consider the potential impact that assisting one child with homeownership can have relationships with your other children. An example from real life could be family resentment simmering if one child perceives favoritism in financial assistance. To avoid such situations, parents could establish clear expectations by discussing their financial assistance plans openly with all children involved.

Bottom Line

Helping a child become a homeowner is a financial milestone that can have both emotional and financial implications. There are many homebuying strategies that you can use to support this dream. These include monetary gifting, providing a favorable mortgage, buying and renting the property or cosigning the mortgage. But while you can help your child gain financial independence, as a parent you must also consider their financial standing and the potential impact on your relationship with other children.

Home Buying Tips

  • Buying a home is a major financial decision that will likely have a significant impact on the rest of your finances. A financial advisor who offers financial planning can help you make this decision and then integrate the purchase into a comprehensive financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who get started now.
  • SmartAsset has tools designed to help you plan for your big purchase. Our mortgage calculator will give you an estimate of how much your mortgage could cost you each month and over time, while our closing costs calculator will help you project how much you may end up paying at closing. And if you’re just starting the home buying process, consider using this tool to figure out how much you can afford to spend on a home.

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