If you are considering helping your adult child purchase a home, you are certainly not alone. Millennials are facing higher student debt, steeper mortgage prices, and other significant financial barriers compared to past generations so there are definitely valid reasons to help. In fact, a 2021 report from the National Association of Realtors found that nearly one-fourth of homebuyers between the ages of 22 and 30 were recipients of cash gifts from family and friends for their down payments.
While you probably want to help out your child as much as possible, keep in mind that it is very important that you don’t give beyond your means. If you don’t plan properly or are overly generous, you could jeopardize your own financial health, like your retirement savings. So let’s look at a variety of ways in which you can help your kids buy a home while setting both of you up for financial success.
Give a Cash Gift
Gifting your child the money they need to help buy a home could be a great way to give them the jump-start they need. If they have been saving up for a down payment, maybe you want to provide the difference from where they are to their target 20%, which may help with your child’s mortgage rates and ease the financial strain over the life of the loan.
Keep in mind that the 2022 annual gift tax exclusion is $16,000 per donor for each recipient, which means if you stay under the annual exclusion, then there is no need to file a gift tax return. Also, be aware that large financial gifts may create a problem for your child during the mortgage process. If a lender sees a sudden influx of cash, it could trigger some red flags. Ensure the lender knows the money is a gift and not a loan by providing a gift letter as documentation.
Of course, avoid raiding your retirement funds or going into debt to fund your child’s home.
Loan Your Child the Money
If you have money to help your kids but would like to see that money returned later, or if they would be comfortable accepting cash but only if they could return it, then a loan might be a fit for you. For it to be mutually beneficial, you may consider charging less than a conventional loan interest but higher than the average investment yield (if the parent were to be investing this money in the stock market).
Again, keep in mind that If the loan is over $15,000 and you don’t charge an interest rate and are eventually audited, there could be negative consequences as the loan will be perceived as a gift and therefore has different tax implications.
Buy the Home for Your Child
One of the most common ways parents help kids buy a home is to simply buy it outright and then rent or give it to the child. After all, real estate is an investment opportunity. Parents who buy a home and allow their child to live in it might be able to take significant tax deductions. Property taxes, mortgage interest, repairs, maintenance, and structural improvements are generally deductible on a second home.
Co-own the House
Co-signing helps your child by adding the power of your creditworthiness to the equation, balancing out any deficiencies in your child’s credit history to help secure a larger loan. Of course, understanding the responsibilities and expectations of the arrangement are critical to the success of this method. The benefit is that your contribution would get you equity in the home and when it is sold, you get your money back.
Whether looking to help your child buy a home in Naples, Florida, or seeking a new home for yourself, Venture Title Services can help ensure your transaction is smooth and stress-free, contact us today.