Steadily increasing home values in New Jersey, together with growing student loan debt, means that buying a home remains out of reach for many millennials. However, with interest rates still relatively low and the housing bubble well behind us, buying a home is truly a solid investment.
For these and other reasons, many “boomer” parents are helping their children buy their first home in record numbers. In fact, according to National Association of Realtors, 25 percent of all first-time homebuyers under the age of 37 receive some form of financial help from family members or friends when purchasing a home.
There are several options available when helping a child or family member purchase a home. There are, of course, pros and cons to each of the various options discussed below.
Most parents simply write a check, gifting their children the money for a down payment or pitching in what they can for closing costs, home repairs, furniture and other expenses. Yet gifting is not always as simple a matter as it appears at first glance.
For example, the gifting of money is never taxable as income to the recipient. However, a gift that exceeds the yearly gift tax exclusion (currently $15,000.00 per person) may have significant tax consequences to the donor. Hence, before making a large gift to anyone, it is always prudent to check with your tax professional or financial adviser to avoid any negative tax consequences.
It is also a good idea to be clear about the nature of the gift. For example, the mortgage lender will likely require an affidavit from the parent clearly stating that the money given is a completed gift, rather than a loan which must be repaid in the future.
If you wish to make a loan and not a gift, the loan should be adequately documented, in the form of a promissory note, clearly stating the amount loaned, interest rate, monthly payments, if any, and a final maturity or due date. Remember, that loans, unlike gifts, will be carefully scrutinized by your lender and will have an impact on how much your lender will loan to you, your interest rate and other mortgage terms.
The best advice to follow when loaning money to a child or other family member is to never loan more money than you can safely afford to lose. This is true because even if your child has every intention of paying you back, unforeseen events can make that impossible. Carefully following this unwritten rule will prevent financial chaos in your life if the worst happens and your child cannot repay the monies loaned.
Be your own financier
As an alternative to loaning or advancing money, you may consider purchasing the house yourself and then have your child enter into lease with an option to buy or other contract with you to pay back the money you invested in the purchase. Ideally, this is a win-win situation: you ultimately make money as an investor, while your child pays less interest than if a loan was sought from a traditional lender. Of course, this method requires you to have the capability to purchase the home yourself.
Sign as a co-borrower
If your child is unable to get a mortgage or has a high interest rate, you may consider signing as a co-borrower. However, this gives you a great deal of personal risk if your child is unable to make mortgage payments. As a co-borrower, late payments or defaults can also affect your credit score. Many people believe that co-signing or being a co-borrower isn’t really a big deal. Nothing could be further from the truth. It is important to understand and know that co-signing or being a co-borrower with someone else exposes you to all of the same risks as if you applied for the loan in your name alone. If your child or borrower doesn’t make payments, you could become fully and completely responsible for the loan, not to mention the damage done to your credit score.
Consult an experienced real estate attorney
There is more than one way to help your child purchase a home. In every case, an experienced real estate attorney can help you mitigate personal risk, ensure contractual terms are clear and help you understand the options available to you, together with any attendant consequences.