Between higher housing costs and tighter lending regulations, it has become increasingly difficult for young people to buy their first home, many having to move back in with their parents after college or university in order to pay down debts and save up the required down payment. Read Globe Article
Many parents want to help but aren't sure the best way to do that and what the potential impact will be on their financial situation. Here's a couple of options to consider.
A Gifted Downpayment
A recent survey done by TD Bank indicated that one in four baby boomers are helping their children and/or grandchildren out financially. Most lenders will accept gifted funds for a down payment on a house as long as it comes from an immediate family member and there is no repayment requirement. The details need to be laid out in a formal Gift Letter (most lenders have a proforma available).
Things to consider - Your Resources:
If you are planning on gifting funds to your child to help them buy a house and you have other children, you need to consider whether you will have the resources to help all equally. If not, this generosity may have wider implications on family dynamics and may cause resentment or rifts down the road.
You also need to review your own financial needs now and in the future and make sure that you will not be putting yourself in a cash crunch by helping out. Meeting with your financial advisor before making such a commitment is a solid strategy.
Where are you planning on taking the funds from? If you need to cash in investments to obtain the cash, you may be facing tax implications depending on what the funds are currently invested in and how they are registered.
Your Child's Spending and Saving History:
Can your child manage the costs of owning a home? What are their spending habits now? Do they already carry significant debt in the form of credit cards or student loans? It may be a wiser option to help them reduce these other obligations first before jumping into home ownership.
Working with them on a budget, perhaps letting them move home for a time to reduce costs or even gifting or loaning them funds to pay off high interest debt may be a smarter strategy in the short term to make sure they are in the best position possible and have the right financial habits in place before handing over thousands for a house they may not be able to carry.
Unhappy Endings:
A last consideraton to think about is what could potentially happen to your gift if your child's marriage falls apart. Typically the equity in the matrimonial home gets divided between separating spouses and a good portion of the gift you so generously provided to your offspring ends up in the pockets of someone who is no longer in their life
Moving them back in
Letting your children move in with you rent free can help them pay down debt and save up their down payment. To keep things as peaceful as possible, lay out the ground rules ahead of time; how long they can stay; expectations as to contributing to living expenses while at home like groceries and utilities and chore responsibilities so that you don't end up doing all their cooking and laundry while they are there!
Co-signing or Guaranteeing their Mortgage
Adding your information to your child's credit application can help obtain approval due to the addition of your income and the strength of your established credit. Most lenders will require you to go on the title so that may affect tax credits available to your children if they are first time homebuyers. Some lenders will allow your percentage of ownership to be as little as 1% so make sure to check out these allowances before choosing who to finance with. You being an owner of a property that you don't occupy may also have tax implications so it's always a good idea to talk to an accountant about which options make the most sense for you.
Regardless of whether you are a 1% or 50% owner, you are 100% responsible for the full debt should your children stop making their payments on the mortgage for whatever reason. The mortgage will show up on your credit bureau with the full debt and payment history and may impact your ability to borrow funds for yourself if needed.
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