Parents: The New Mortgage Lenders

According to a survey from Better Homes and Gardens Real Estate, 68 percent of people expect to provide financial support to their children or grandchildren to make homeownership possible for them. Since the housing bubble burst in the late 2000s, there has been a growing trend in parent-assisted home ownership. Three factors can determine if a family is financially ready to invest in real estate. The parent’s finances, the child’s finances, and the actual real estate deal, all these factors need to be systematically outlined before signing onto a huge financial obligation.

For parents, it’s important to consider the future first. If retirement is on the horizon, parents should prepare for their financial future and budget accordingly. If a large sum for a house payment or loan will not be a financial burden on the parents, then it could be an opportunity to help boost their child’s finances. Additionally, should the parents loan their child money for a down payment, they need to make sure they can afford to take over mortgage payments if their child cannot. It would be unwise to help finance your child’s home if you will not be able to pick up their mortgage payments should something unexpected happen. Beyond money, parents can assist their kids with house purchases by giving the gift of knowledge. Ensure that the kids know the risks involved with investing in a home. There can be unforeseen repairs, replacement of vital electrical or plumbing systems, and more.

HOW TO LEND TO YOUR KIDS:
Cash – A cash donation is the simplest way to assist with the down payment. The most an individual can give to another, without incurring taxes, is $13,000. Cash can be the best way to help finance your kid’s home because most young people have not yet had the chance to save for a long period of time. They are in need of a large sum of money to make the down payment, which can range from 10-20 percent of the price of the home. The larger the initial down payment, the smaller the mortgage payments. For a young person, a large upfront payment can relieve some of the financial burden later.

Rent-to-own, lease-to-own – Many parents use a rent-to-own arrangement (also called lease-to-own) when helping their kids with their first home purchase. In this setup the parents buy the house by putting down the entire down payment and let the child pay rent to cover mortgage payments. When the child is financially ready, for instance after they’ve found a steady job with regular income, the parents can then sell the property to the kids. For a rent-to-own, it is important to have a written contract with the arrangement details. Parents and kids should also consult with tax professionals and a lender to cover all the risks and details of a rent-to-own agreement.

Loan – Finally, parents can sign or co-sign on a loan for the child’s house purchase. A loan from a parent can be much more lenient than from a bank, allowing the child to pay it off quickly without accruing additional charges in interest. For parents who co-sign on a loan, it’s important to be aware of risks. If the child misses payments or defaults on the loan, the parents may face financial consequences in addition to having to cover the cost of loan payments. In times of crunch, if the adult child has lost a job or needs to buy a new car or home, a loan from a parent can be a successful route to getting the child back on track.

MAKE IT FORMAL
In the face of a large financial decision, no matter which way a parent helps out a child, draw up a contract. If the child mistakes a loan for a gift, unless specifically spelled out, situations could become uncomfortable. With written agreements, parents can avoid messy family squabbles and make planning an estate easy.

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