NEW YORK – High mortgage rates, inflation and a super-pricey housing market have dashed the dreams of scores of potential first-time homebuyers – all of which has made many parents wonder what they can do to help.
If you want to help a child get into the housing market, there are options with the caveats that you are financially stable and have a comfortably funded retirement savings plan.
Good news: The timing for first timers to enter the housing market could be good if interest rates start falling this fall as expected.
But before extending a helping hand, answer some important questions: Should I help my kids financially? Do they even want my help? How will helping with the down payment impact my retirement reserves? What rules apply that can impact how much to finance my child’s first purchase?
You might dread having this family conversation, but it can be uplifting for you and your adult child to lay out a plan. Here’s a guide on how to prepare.
Advance planning
Jeff Ostrowski, a housing-market expert with Bankrate.com, urges parents to “set up children for homeownership well before the kids are adults who are ready to buy.”
That means teaching and preaching the basics of budgeting, investing and avoiding bad debt on credit cards while steering clear of massive student-loan debt that can suck money away from a housing fund.
Along those lines, help kids build their credit scores by adding them as authorized users on your credit card.
Gregg Murset, chief executive officer at Busykid.com, said kids who want to buy a house should have a steady enough income to afford it, look into the different forms of financing available and not lean on their parents’ retirement fund as the savior.
Gifts
Parents can give their child a lump sum to cover all or part of a down payment, said Nicole Lehman, a spokeswoman for Clever, a real estate data company. A single parent can give up to $18,000 per child per year, while a married couple can give up to $36,000 without being taxed.
Parents can give a larger cash gift if they take advantage of the lifetime gift and estate tax exemption.
Finance the purchase
Become the Bank of Mom and Dad and loan your child the money at a favorable interest rate. To avoid tax and mortgage complications, the loan needs to be formalized with a promissory note so there are no misunderstandings about repayment terms and conditions.
Another loan option: If the house needs upgrades, parents could lend money to pay for repairs after the sale closes, said Ostrowski.
Cosign a loan
If your homebuyer has low or bad credit, you can cosign a loan. This may help to get loan approval and better terms. But beware, said Lehman: If your child fails to make payments, parents could be on the hook.
Ready or not?
Make sure your adult child is truly ready to buy.
“I occasionally hear from parents who want homeownership more than the kids do,” Ostrowski said.
“If your adult child has stable employment, a good credit score, and has been saving toward a down payment, you have my blessing to gift whatever amount makes sense to help them achieve homeownership,” Ostrowski said.
However, he added, if your adult child has taken none of those steps, “that’s a sign that they’re not ready and that you should bite your tongue and bide your time until they are.”
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