Here's the home buying news from Australia: 55 percent of first time home buyers (that's our generation of kids) got help from their parents (that's us) last year.
Here in the U.S, one-third of those 37 and younger used a gift or loan from family or friends to come up with a down payment for a house.
It's a first-world universal: If we can afford it, many of us take on that down payment assistance willingly. We may see it as a part of a “living inheritance.” That is, a chance to see our kids make good use of what’s coming to them when we're not around to see how they use it. Or, we may want to see our kids living free and clear of a landlord. Or in a better neighborhood. Or to have an investment that will grow with time.
But no good deed comes without complications. Here are six big things to think about if you can afford to be a financial angel for their home purchase.
ONE: Family Dynamics.
There may be other family members--say, siblings of the future home owner--who feel the scales of parental largesse are being unbalanced, and not in their favor. It may be presumptuous and ungrateful on their part, but there it is. Communications about what you're doing and why--and whether the sibs can or should expect similar assistance--can keep everyone feeling fairness rules.
If an adult child doesn't qualify for financing, parents may have to act as guarantors or as “co-signors” on the mortgage itself, meaning they are shown on the title as a co-owner and on the mortgage directly. Co-signing is the more common approach, but it raises several questions such as whether the parents have an actual ownership interest. There are also questions about what happens if one of the parties passes away or, if the child is married, gets separated or divorced.
If an adult child qualifies for a mortgage on his or her own, parents can make the purchase more affordable with a gift that boosts the amount of down payment or helps lower the interest rate. No need for co-signing or guaranteeing. Write a check for any amount you choose. That's it — no contract or ongoing commitments. But gifter beware: Lenders like to see money gifts — easily traceable checks, bank transfers or wire transfers — in a borrower's bank account three or four months before they apply for a mortgage. Givers and recipients may need to sign letters confirming that the money isn't a loan.
In addition to or in lieu of down-payment assistance, a cash gift can pay all or part of an expense such as mortgage closing costs.
Here's an additional benefit to down-payment assistance: It can help new borrowers avoid paying for private mortgage insurance, which in turn helps keep their monthly payment lower.
If it's a loan, you can still write a check for any amount but it's best to write it all down in a contract that defines obligations. Not only does that avoid misunderstandings--especially about repayment schedules--but if the parent-lender dies or becomes incapacitated, there's more transparency. All the heirs can view the transaction and its history.
FIVE Being A Banker
If we've got enough cash, we can be the mortgage lender. We can offer easier terms, like no closing costs or no down payment. We could charge a higher rate of interest on the mortgage than our money earns in a savings or money market account and still offer our kids a lower-than-market mortgage rate. But family lenders must charge at least the Applicable Federal Rate , the minimum interest rate required to keep the assistance from being considered a gift.
It's a fairly complicated business but there are companies that can help with the set-up details and provide all the forms and documents you need to meet state, local and IRS requirements. They can also guide families through the settlement and filing process.
Personally, this is too complicated for my taste. Plus, I wouldn't want to be my child's banker. Hard enough being their parent.
Anyone can give any other person a gift up to $15,000 in value (money or, say, stocks) without filing the gift-tax return IRS Form 709 . So each parent can give each child — and the child's partner and their children — up to $15,000 each without having to complete Form 709.