With homeownership among the under-35 set dropping from 43% in 2006 to 35% in 2017, parents seem to be taking matters into their own hands.
More than one in four first-time homebuyers got financial help from family members (mostly parents, presumably) during the 12-month period ending September 2018, according to a recent Federal Housing Administration report. That’s an 18% increase since 2011.
But the decision on whether or not to help isn’t always clear-cut, says San Francisco-based certified financial planner Lynn Ballou, who helped her own daughter buy, and has advised many clients about doing so. The answer depends on your own financial situation, as well as how you’d structure the gift.
Make sure you can afford it
Before you give your kids a big chunk of money, make sure the gift won’t impact your standard of living—now or in the future. You certainly won’t be doing them any favors if you put yourself in a risky financial situation.
“It’s like they tell you on airplanes,” says Ballou, “‘Put your own mask on before helping your kids with theirs.’”
Talk to your financial planner, your accountant, or whomever you trust to give you financial advice and run the numbers together to make sure your gift will not impact your current standard of living, or your retirement savings.
Make sure you leave a margin for unforeseen medical expenses and bad stock market returns, says Ballou.
It’s also reasonable to structure the gift as a loan, putting the kids on a payment plan to repay the money.
And don’t be afraid to say no. If your kids can’t afford the house they want, maybe they need to find a smaller one or save for a few more years before buying.
Think about family dynamics
If you’re helping one of your kids buy a house, you may feel obligated to do the same with your other offspring.
But you can equalize things with future gifts or by writing into your will that the same amount will go to the other siblings before the remaining estate is equally divided.
And you can also think less rigidly about equality. “It’s best,” says Ballou, “When families tell their kids, ‘we will help you all fairly in whatever way we think is best, but if anyone starts keeping a score card, we’re done.’”
Decide how to structure the deal
Once you’ve decided to offer support, you essentially have three options: Give cash outright, co-sign on a mortgage, or help with ongoing monthly costs.
Co-signing may seem tempting, says Ballou, but is often riskier than parents realize. “It leaves them on the hook far more than they ever intended at a point in life when big debt is not such a hot idea,” she notes.
Instead, she says, you may want to consider carrying the loan yourselves and setting up a lease-to-buy payment plan with your kid. That way you have the house as collateral and can sell it if things go south.
You could also structure the down payment as a loan, requiring your child to pay your back, with interest. Just keep in mind that mortgage lenders require borrowers to disclose if any of their downpayment money comes from a loan. And don’t even think about fibbing, says Brooklyn Law School real estate law professor David Reiss:“People do get prosecuted for lying on mortgage forms,” he says.
Ballou also warns against helping with the ongoing monthly costs of carrying a house. “One-time downpayment help is often a better way to encourage responsible financial management versus a sense of entitlement,” she says.