For decades, owning a home has been the primary way that Americans build wealth. The challenges faced by young adults who are reaching for the American dream today, though, are significant. According to a recent study by the New York Federal Reserve, student loan debt accounts for as much as 35 percent of the decrease in young adult homeownership from 2007 to 2015. In today’s tight credit environment and challenging economy, how can you give your children a leg up on the American dream and help them with what's likely the biggest purchase of their lives?
1. Gift your children down payment funds
Provided that your retirement needs are attended to and you can afford it, helping your children with the down payment is among the simplest ways you can help them buy. Even though a 20 percent down payment isn't necessary to buy a home, coming up with enough liquid assets to cover even a 3.5 percent down payment can be a challenge for first-time buyers, which is why parent assistance is frequently provided. Should you choose to give money to your child for a down payment, you can avoid paying tax on it provided that it's below a certain dollar amount.* To learn more about the gift tax, check out our Top 4 Myths for Gift-Giving blog in our Parental Mortgage Assistance Portal.
2. Help them qualify by becoming a co-borrower
If your child is having difficulty qualifying for the mortgage because they haven’t reached their full income potential, you can help them overcome this hurdle by co-signing the loan. This is a good option for buyers with sufficient down payment funds and enough savings to afford the cost of homeownership. Of course, this form of help should only be undertaken if you are confident your child will be able to make monthly mortgage payments, pay taxes, and cover homeowners insurance without a snag. Should your child default on the loan, it would hurt your credit, affect your cashflow, and become your responsibility.
3. Give the gift of equity
Want to sell your current house to your child at a discount? If you’re planning to move up or downsize, this is a great way to help your adult children buy. Let’s say your house is valued at $200,000, and you want to sell it to your kid for $160,000. In this case, the difference between the fair market value ($200,000) and the sale price ($160,000) is considered gift equity. This is an excellent way for parents to help children meet down payment requirements for the mortgage, keep a familial home through generations, and live in a nicer neighborhood. Provided that your estate isn’t worth more than $5.49 million, you will not have to pay taxes on this gift. Consult with a tax advisor for details.
Each of these options has their own merits, and your situation will dictate which is best for you and your family. To discuss these options further, feel free to contact your Apex representative. In the meantime, for more information on helping your children buy a home, visit our Parental Mortgage Assistance Portal, where we round up a treasure trove of resources for helping your children buy.
*Consult a tax advisor when it comes to the tax implications of financial gifts.
Topics: First Time Home Buyer, First Time Homebuyer, Buying a Home, help children buy home, help kids buy home, ways to help kid buy home, down payment gifting rules, giving child money for down payment