How to Help Your Kids Buy a House
With the shifting housing market, many past clients have been reaching out to me about how they can assist their kids in buying a house. There are a lot of dynamics involved, as well as many awkward conversations between kids and their parents. There are a lot of things to consider like tax implications, how lenders see the “help,” and what the financial agreement looks like.
The first step in helping is having candid conversations. Many of my buyers tell me their parents are going to help. But we need to know exactly what than means. Is it help with the down payment? Is it buying furniture? Is it finding them a lender? For our purposes, we are going to talk about financial help with a down payment and/or being a cosigner. Each scenario has specific rules as it pertains to a loan and taxes. Remember, owner occupied financing is less expensive than “investor” financing. Here are some ways that I have seen parents helping. Of course, these are just situations I see, always consult an accountant as well as a lender before proceeding.
Pay Cash for the House
Although the market is starting to shift a bit, good homes are still getting multiple offers. Paying cash for a home can put you in a much more competitive position in multiple offer situations. Kids can ask their parents to buy the home with cash. Of course not every parent has the cash, but you would be surprised how many have it and are willing to help out their kids in this way. Right after closing the house can be sold back to the kids and the kids can get a loan. They could also quit claim the deed from the parents to the kids and get a loan on the house. All of this would be planned ahead of time, but this is the best method if the family has the resources.
Gift of the Down Payment
Parents can gift the entire down payment to their child if they wish to. Lenders tell me there are no limits to this BUT there are definitely limits from a tax perspective (you must declare as income any amount above IRS allowed maximums). Usually, there is a blend of parent’s funds and kid’s (borrowers) funds. For instance, say the kids are purchasing a $400,000 home and want to put 20% down, $40,000 comes from the kids and $40,000 comes from the parents. All good as long as the buyers qualify.
One or both of the parents can co-sign on a loan with the child. It still qualifies as an owner-occupied loan as long as the child is on the loan with them. This is most often used when the child has a debt-to-income ratio issue. In that case, all parties incomes AND debts will have to qualify within the lenders ratio boundaries. If there happens to be a case where a child is disabled, the parents can purchase the home and still get owner occupied financing. This also is available for parents who want to buy a home for an elderly parent.
A few other thoughts, I run into a lot of scenarios where kids have not established credit yet, so they don’t even have a score, or its too low. A parent can add their child as an authorized user on one of their credit cards and that will start a credit history for the child. This usually takes 6-12 months to have a full impact. As mentioned, if you want to help your kids, I would first talk to an accountant and then talk to a lender. They will usually “steer the ship” since we must play by their rules. Please contact me if you are looking for other ways to help.