These days, more and more parents are buying homes for their adult children, providing gift funds, or loaning them money to make the big move. A 2016 survey from Bank of America showed that 19% of millennial homebuyers expected parents to help with their down payment, while 15% expected help with monthly mortgage payments.
Read on below to get the scoop on this unusual twist in first-time home buying. We’ll tell you why it’s happening, and if you're also expecting help from Mom and Dad with your home purchase, what to look out for.
What’s behind the trend
It’s shouldn’t surprise anyone to hear that Millennials (typically defined as those currently between the ages of 20-37) are still struggling to become homeowners. A recent Business Insider article reports the United States boasted $1.44 trillion in outstanding student loans at the end of the first quarter of the year, which - along with a slow job market and stagnant wages - more than likely account for why so many young adults are unable to put down roots at the same pace as previous generations.
However, in an effort to try and help their children receive the same opportunities they enjoyed, an increasing amount of Baby Boomer parents are willing to help their offspring purchase their first home. According to TIME, 17% of parents expect to help their children buy a home within the next five years, which is a 30% increase from a similar survey conducted five years prior.
Want in? Here’s how to make it work
So, whether you’re a parent looking to give your child a leg up or a Millennial trying to figure out how you can swing purchasing your first home, you’re far from alone.
If you’re thinking of joining in on this trend, there a couple of different ways you can go about it:
1. Buy the home outright & let the child live in it
These days, whether it’s because property values are lower than dorm fees in college towns or simply because they’re feeling generous, more and more parents are simply using their excess income to buy another home as an investment property and let their child live in it. Whether or not rent is involved can be handled afterward.
In this case, the financial pattern would follow any other traditional home buying scenario. Since the children wouldn’t be involved, the parents would have to show their ability to be approved for another mortgage and make the downpayment.
2. Give gift money
One of the most common ways that parents can help their child is by giving them gift money, which is usually put toward a downpayment.
But, there are some guidelines.
According to current Internal Revenue Service (IRS) regulations, every taxpayer can gift individuals up to $14,000 tax-free, annually. This means that parents can give up to $28,000 per year for a down payment. That number can double to $56,000 if the child is married and his or her parents also give a gift to their spouse.
If you decide to go this route, while the IRS may not need to see a paper trail for this maneuver, the mortgage company might.
Be sure to ask your loan rep for their specific requirements, but you should expect to show bank statements proving the longevity and transfer of funds.
3. Negotiate a family loan
Sometimes, the Bank of Mom and Dad (or another well-off relative) is the best way to go.
Oftentimes, since family members aren’t looking to make a profit of the loan like a traditional bank, they can forgive the loans interest rates via the gift tax. If the parties involved are able to swing this arrangement, it has the added benefit of allowing adult children to build up credit and still take mortgage interest deductions without the added risk of traditional loans.
Again, mortgage companies are going to want make this arrangement official. You’ll need to have a lawyer draw up a legally-binding agreement and show paperwork to show how the money is changing hands.
4. Become co-signers
This option is typically used when a child is unable to qualify for the loan on their own.
In this case, even if the child is the one who will ultimately end up being responsible for making the mortgage payments, both parties will be seen as equal owners on the loan and so everyone involved will need to be able to qualify. Parents should be aware that mortgage companies will also be looking into their finances.
Tips for a smoother process when buying with family members
Anyone who’s ever entered into a deal with family can tell you that money is only one piece of the puzzle. Emotions can run high, and sometimes, navigating relationship patterns can be far from easy.
Here are some ways to make sure all parties are on the same page when family members are involved:
Set expectations from the get-go: "Do the parents need to be included in showings, do they want to have a voice in negotiation, are they just signing the check? Knowing these things upfront will make the process much easier," says real estate agent Jen Teague.
Get everyone involved early in the process: Buying agent Jon Boyd cautions, "Don't just bring Mom & Dad in at the last minute and expect them to be able to help you make important decisions on your purchase without knowing the area or inventory."
Communicate openly & honestly: "Parents need to accept that children may have different wants and needs than they do for their home, and the kids should be prepared to accept their parents’ opinions on the purchase, if they are helping buy the home," says real estate agent Andrea Vaccarelli.
Remember, they want what's best for you: "Parents want to set their children up for success. Plus, they'll want to protect the investment more than anyone else," notes Open Listings' Beatrice De Jong.
Since many parents have seen the value and importance of investing in real estate, it's no surprise that when it comes to homebuying, if they have the means, they'll want to help their children financially.
While it's important to seriously weigh the pros and cons to turning homebuying into a family affair, a little help from the parental units may be the catalyst you need to home ownership.