Thinking of helping your child purchase a home?
Imagine searching for your first home in today’s market. Real estate prices continue to soar. Mortgage regulations are stricter. The cost of living is only increasing. It’s a financial challenge.
If you’re the parent of a want-to-be homeowner, you may wonder about helping out with the down payment. Your assistance could enable your child to choose their desired home and location instead of having to settle. In fact, your help may be the difference between your child buying now and waiting a few years to save more.
In a way, you benefit too. Giving an advance on their inheritance allows you to witness how you’re enhancing your child’s life, as opposed to only leaving an inheritance through your will.
But it’s not a decision to take lightly. You should consider several personal and financial issues before opening the bank of mom and dad.
Some parents worry that a child who receives easy money will develop a sense of entitlement. Is the individual better off working for their money, saving diligently, buying a home within their means and learning what it means to be financially independent?
Another consideration is that you might set an unintended precedent. Later, should your child want cash for a swimming pool or capital for a start-up, they may ask and expect you to come through again.
If you have more than one child, you may need to ensure that helping one with a down payment doesn’t cause discord among siblings or ill feelings toward you. Will you update your will to reduce the child’s inheritance accordingly? What if another child asks for a similar advance, whether for a down payment or something else altogether?
Before you decide whether to help out or how much to give, it’s important to determine if your contribution will impact your retirement savings objective or other financial goals.
Should you go ahead, note that many mortgage lenders require you to sign a gift letter, which the lender typically provides. The letter makes it clear that the money is in fact a gift, not a loan – as the lender wants to make certain the borrower isn’t taking on additional debt. You can also look at options that don’t involve gifting funds, such as co-signing the mortgage.
If you’re wondering about helping your child buy a home, feel free to contact us. You can give thought to the personal considerations, and we’ll help you with the financial side.