Even though interest rates are still pretty low, it remains a huge challenge for kids to buy a home these days. The biggest obstacle is the down payment of course. So what do you do if your children can’t buy a home without your financial assistance? Do you whip out the checkbook or do you give them the old cold shoulder? Is there is a mid-way compromise? Let’s take a look.
You can help your children in any number of ways. Of course you can deliver a home to your child mortgage-free. But that isn’t your only option. You can provide the down payment or loan them the money for the down payment. You can also choose to co-sign the loan if you like. And you there is also the option of wishing them good luck and going about your day.
There are financial and tax ramifications to each of these ideas. If you give a home to your child outright, you have to consider the potential gift tax fallout. You also may have to think about gift tax if you provide the down payment.
And if you loan the kids the money, you have to be brutally honest with yourself. Are you likely to ever see that money again? And no matter which alternative you pursue, you have to have a game plan worked out ahead of time just in case your son or daughter becomes unable to make the payments or hold on to the house for any other reason.
Can The Kids Afford It?
Buying a home is different than owning a home – but both cost money. Does your child have the financial means to maintain the home? Can they afford the house? That includes the mortgage, taxes, insurance and repairs. How stable is their job? Do they have enough emergency money to cover unforeseen events or home repairs?
Young people just starting their career move around often and that can throw a monkey wrench in to their real estate ambitions. Buying a home usually only makes sense if they hold on to the property for at least 7 years when you consider all the costs involved. And that’s if the house appreciates. If the house doesn’t appreciate it may take much longer for the kids to sell the house and break even.
Remember, the housing crises of 2007 was a result of too many banks loaning too much money to too many people who couldn’t afford it. Despite your best intentions, make sure you aren’t setting your kids up for a big failure.
Can You Afford It?
If you can afford to write a check for the house and never see that money ever again, more power to you. But if you have to take out a loan to help the kids, slow down. You have to consider the worst case.
If the kids aren’t able to repay you, is it going to be hard for you to make your loan payments? What happens then?
Even if you don’t take out a loan, you could find yourself in hot water. Let’s say you don’t take a loan but liquidate investments to provide the assistance. You are not going to earn anything on that money now that you’ve liquidated the investments. Can you afford that income reduction?
Last, consider the precedent you are creating. If you help one child, what about the others? If they see you give a chunk of change to Mini Me #1, they’re going to want the same. Can you afford to double, triple or quadruple the financial assistance you want to provide? If not, you really have to re-think your position.
If you co-sign the loan you may think that you aren’t on the hook financially, but hooked you are Pilgrim. That’s because no matter what happens, you’ll have to cough up the dough if Junior doesn’t. And if your progeny flubs up on making the payments, your credit score is going to get muddy just like theirs. Consider it.
I acknowledge that it’s harder for kids to get their foot in the door of the housing market these days. Salaries haven’t kept up with housing inflation and that means it’s really tough for the kids to come up with the down payment.
But before you write that check, make sure your children can handle the ongoing costs of owning property. Then, make sure that you aren’t putting yourself in a bad spot by helping them.
Are you going to help your kids buy a home? How? How will that impact your situation? How do you know they’ll be able to afford the property?