Parent’s Guide To Helping Your Kids Own A Home

When the time comes for your child to start a life on their own, you may want to help them make that jump. You aren’t alone, because according to the National Association of REALTORS® (NAR), 23% of those 37 and younger used a gift and 6% used a loan from family or friends to purchase their home. There are various ways parents can help out. Maybe it’s through giving sage home buying advice, spending your time helping them research or helping out financially through lending, co-signing or buying a house with your child.

Whatever the case may be, we want to help guide you through this process to ensure that you set up yourself (and your child) for financial success. Parents who help out are giving their kids an average of $39,000 to buy a home and putting their own retirement at risk in the process. See a specific section below or peruse through all of our parent and child home buying tips:

• Should You Buy Your Child A Home?
• Considerations For Parents Before Helping Out
• Home Buying Assistance Options
  • Renting Out A Room In Your Home
  • Loaning Your Child Money To Buy A Home
  • Gifting Money For A House Or Down Payment
  • Cosigning And Buying A House With Your Child
  • Buying A House For A Child To Live In
  • Selling Or Gifting Your House To Your Child

• Additional Ways You Can Help Without Spending A Dime

The answer to this question varies from situation to situation, but we’ll help break down some of the pros, cons and arguments to consider. Before you dive in and make any decisions, it’s important that you speak to a legal or financial advisor to ensure that whatever decisions you make are beneficial and not detrimental to either you or your child. Millennials are facing higher student debt, steeper mortgage prices and other significant financial barriers compared to past generations so there are definitely valid reasons to help, but to what extent is it necessary to do so?

This guide is not a replacement for legal or financial advice and should not be seen as such. This is a great jumping-off point, but we encourage you to explore your specific situation.

Pros

Helping your child land the home of their dreams could be very rewarding, if done correctly. Some pros of buying a house for your child include:

• Earlier start for your child to invest in their future wealth
• Mutual benefits if you go in on property costs together or they plan to pay you back
• Inheritance tax benefits to consider
• Parents can help steer their children away from predatory loans or poor property investments

Cons

Some argue that it’s usually best to have children find their own way so they don’t rest on their parents’ laurels. Some cons to consider when buying your child a house are:

• Damaged credit if you co-sign and they don’t keep up with payments
• Sizable dent in your retirement savings if you don’t plan well
• Financial dependency or entitlement from your child

It’s also important to consider that helping out your child could actually make them less dependent on your assistance if they are able to start building equity from a younger age, rather than being stuck in a cycle of renting and trying to save.

You may have heard warnings against going into business with family, but did you know that loaning, co-signing and gifting money can have a lot of the same consequences? If you don’t properly communicate and plan, you could stress your relationships and finances. Below, see some things to consider beforehand.

Examine How This Could Affect Your Relationship

You can’t put a price on a great relationship or family bond, so it’s important to consider how lending or gifting large amounts of money can change things. Children may feel overly indebted to their parents or there could be new stressors added to your relationship. These are all things that you should talk about beforehand. You might consider speaking to a family counselor to ensure you’re on the same page and have the right tools to effectively communicate.

Don’t Give Beyond Your Means

While you probably want to help out your child as much as possible, it’s very important that you don’t give beyond your means. If you don’t plan properly or are overly generous, you could jeopardize your own financial health, like your retirement savings. This could also add a hidden layer of resentment or stress to your relationship with your child. Speak to a financial advisor so you know where you stand and what you can give within your means.

Draft Up A Detailed Agreement

In order for both you and your child to feel comfortable going into one of the agreements below, you should always draft up a legal agreement. This doesn’t mean that you’d have to pursue a lawsuit if your child misses a loan payment, but it just helps lay out the expectations so everyone is on the same page and protected from expectations that fall outside of the agreement.

This may feel strange, especially if you have a tight-knit relationship with your child, but it will actually help de-escalate any disagreements over the terms of your loan or gift.

Make Sure Your Estate Is In Order

There are a lot of complicated moving parts that arise when you loan or gift money to your child. Not only do you want to make sure that everything is in order with a particular agreement, but you also need to know how that fits into your overall financial plan. If you have other children, you should consider how assistance for their sibling could or should affect their inheritance and how they could perceive their sibling’s gift down the line. For example, if you pass away before a loan is paid back to you, what will the implications be? Save yourself the headache and have an expert help you sort this all out.

Don’t Just Think With Your Heart

All of the above points could be boiled down to the advice of not thinking only with your heart. As much as you love your child, you have to think about what’s best for everyone involved and the big picture. Depending on the route you take there can be complicated tax implications and other limitations. If you know you’ll have a hard time separating financial savviness from family, you should consider reaching out to a financial or law professional to help you sort out a plan.

There are a variety of options when it comes to helping your children out with their housing. Some of the top options include discounted rent for a room, a home loan, a down payment gift, becoming a co-signer, buying a house for your child or gifting your own house to your child. Each option comes with its own set of challenges and specific considerations, so make sure you come up with a plan and an agreement before diving in. 

1. Renting Out A Room In Your Home

Young adults living with their parents is nothing new, and according to Pew Research Center, it’s nothing to be ashamed of either. Average income is not keeping up with the rising cost of living in many cities across the U.S., causing many young, post-college age adults to move back in with their parents – known as the Boomerang Generation.

Renting out space to your adult child below the market value can help them save up money and help you pay off your mortgage. Of course, deciding what to charge and if you should charge your child is a question for you and your child. The first question you should ask yourself is, “What is the goal of my child moving back in?” This can help you determine a fair payment plan and establish a timeline for how long they’d likely be living at home.

Some additional things to consider include:

• How much do homes in your area charge to rent a room?
• Are they going to contribute to electricity, utilities and food costs?
• Can those costs be mitigated if they help out around the house or help complete projects?
• How much can your child truly afford?
• How can you help them achieve their financial goals? 

Are they saving up in hopes of purchasing a home? Try this home affordability calculator to estimate how much home they can afford, as well as the down payment and closing costs needed.

At a glance:

• Great for a child that needs more time to save.
• Their rent can help pay your mortgage payments.
• Figure out rent based on a variety of factors, try to reach a point where it’s mutually beneficial.
• Set guidelines and boundaries ahead of time – know the dynamic will be different now that they’re an adult.

2. Loaning Your Child Money To Buy A Home

Loaning your child money to buy a home could be a great option if you have some money to give but would like to see it returned eventually. This is also a good option if your child has turned down the idea of you gifting them money for a home – it may leave them feeling less indebted or more in control of their financial future.

What interest rate should I charge my child for a loan?

Again, this is up to you and should be discussed with a professional to cover tax implications. For it to be mutually beneficial, you may consider charging less than a conventional loan interest but higher than the average investment yield (if the parent were to be investing this money in the stock market).

If the loan is over $15,000 and you don’t charge an interest rate and are eventually audited, there could be negative consequences as the loan will be perceived as a gift and therefore has different tax implications.*

At a glance:

• Great for parents who want to help but need to see the money returned.
• Can be mutually beneficial – parents can make money on their investment from interest and kids can pay a lower rate than average.
• You should charge interest if the loan is over $15,000.*
• Draft up a formal agreement for payment schedules and other terms.
• You can decide to turn the loan into a gift down the road.
• Speak with a professional about the financial implications.

3. Gifting Money To Children For A House Or Down Payment

Gifting your child the money they need to help buy a home could be a great way to give them the jump-start they need. It can also be more simple and not have strings attached, as a loan agreement does. By helping your child reach the typical 20% down payment, you can help them secure a better mortgage rate and lighten their financial load for years to come. If 20% is out of your reach, any amount will help them, so don’t feel the pressure to provide the full amount.

Speak to a home loan specialist to work out the best situation for you and your child. You should also speak to a tax specialist to figure out the best plan to bestow your gift – the annual exemption is $15,000 ($30,000 for a married couple) as of 2020. You can spread gifts to your children across years and from both parents to gift more while still falling within the IRS guidelines.* Learn about the importance of gift letters:

• Mortgage gift letter guide

Of course, some children feel uncomfortable accepting a gift of that size or meaning and do feel there are emotional strings attached, so it’s important to take their feelings into consideration. Maybe you can gift them something they’ll need for their home further down the line like assistance with renovations or a set of furniture instead.

At a glance:

• Great to help your child have more accessibility to homeownership.
• Gifting money towards a down payment can help your child secure a better mortgage loan.
• Gifting may feel less business-like, compared to loaning.
• Consider your child’s feelings and explore other gift options if this makes them uncomfortable.
• Evaluate the current IRS gift tax guidelines and speak to a specialist.
• As of 2020, the annual exclusion is $15,000 per person.

4. Cosigning And Buying A House With Your Child

Another alternative to gifting or loaning is co-signing their mortgage. When you co-sign, you add the power of your credit history to their application and take responsibility if they default on the loan. If this is a new concept to you, take a look at this guide for an in-depth explanation: 

• Cosigning a mortgage loan

If you co-sign with your child, you can help them balance out their negative credit history, overcome employment requirements (if they’re self-employed) and obtain a larger loan. It’s crucial that you both understand the responsibilities and expectations before you sign or agree to anything. Can they really afford the larger loan payments? Maybe there’s a real reason they aren’t being approved for one in the first place.

Some potential negatives that come along with co-signing include becoming liable for payments if your child can’t make them, having a hard time getting out of the agreement once you’re in it, legal implications if they default on their loan and the potential of having your credit suffer. Additionally, if they pass away or go bankrupt, you’ll be responsible for their loan. Also, if you apply for government assistance, the property you cosigned may be counted as one of your assets and affect your eligibility. 

You probably know your child better than anyone and if you’re going to put your savings and credit on the line, you want to make sure your child is responsible enough to make on-time payments. If your child defaults on the loan you’ve co-signed, it can greatly damage your credit or savings and, in turn, your overall financial health.

At a glance:

• Great for someone who has a poor credit history but now has it together financially.
• Know that you are liable if your child can not afford payments.
• Understand how co-signing may affect your eligibility for government assistance programs.
• Learn about your personal tax and other implications from an expert.
• Consider writing a letter of explanation before trying to get a co-signer.

5. Buying A House For A Child To Live In

Some families may be in a financial situation where they can afford to buy a home for their children. It’s not as simple as just purchasing a property and handing it over. The gift tax comes into play in this situation and if not planned properly, you could incur a 35% gift tax or higher depending on the amount.* 

Plainly put, to work around the gift tax, you’d have to gift a qualifying percentage of the property deed each year (based on the property value) until the home’s ownership is completely passed over to your child. In this case, parents would be the landlord of the property and get to recoup costs there as well, until ownership is passed over. Again, this can be a complicated process and should be discussed at length with an expert. 

This obviously gives your child a huge financial advantage and can really take the pressure off if they’re still in school or are simply not able to afford a home in the area they live in. It’s important to note that this dynamic could affect your relationship, and while your child should be very grateful for the generous gift, you don’t want to make them feel indebted or hold the house over their head.

Conversely, there are some people who don’t understand the full value and responsibility of a large gift like this. If that sounds like your child, maybe try to have them talk to a specialist or take a financial course so they can better understand the value of the money before you give it to them. This could include things like managing the home’s upkeep, understanding how home value can evolve, how much the loan you’re providing lightens their financial load and how to manage the money they saved. 

At a glance:

• Great for a child who’s still in school, dealing with tuition debt or if they live in an area far out of their financial reach.
• Will give your child room to achieve other financial goals.
• Discuss how this might affect your relationship dynamics, consider having a counselor help you sort through the emotions behind such a large gift.
• Understand how the gift tax plays into this situation and how to properly gift a property.
• Make sure your child understands the value of your gift and how to maintain the property properly.

6. Selling Or Gifting Your House To Your Child

There are many reasons why a parent might want to sell a home to their child. Maybe you’re looking to move or downsize in retirement or maybe you want to help your kid out with a generous discount. Whatever the reasoning, there are still many caveats to be aware of in this process. This guide covers everything you need to know but we’ll cover some of the main points below: 

• Selling your home as a parent

When a parent sells their home to their child, it’s known as a non-arm’s length transaction – this is because you have a personal relationship that can add some complications to the process compared to dealing with a stranger.

Make sure you go through some of the same steps as you would for an arm’s length transaction like getting approved for a mortgage, getting an inspection, determining the purchase price, creating a purchase agreement, etc. You might also consider hiring an attorney and a title company to make sure everything goes smoothly – it’s far less expensive to get an expert involved than it is to deal with a costly mistake.

How much should I sell my home to my child for?

First, you should evaluate the market value of your home and determine how much is left in your mortgage. Selling your home for less than what’s still on your mortgage is considered a short sale, which may require an affidavit. Assuming you want to gift your real estate, you should be careful of the gift tax, which could come into play as an equity gift or a capital gains tax if your child sells the home too soon.* 

Make sure you also follow through with a professional home inspection so no one feels cheated if issues arise down the line. A sour deal could cause a serious rift in your relationship.

At a glance:

• Great if you want to downsize or move while keeping the property in your family.
• You can help your child out with a discount, but be wary of tax implications.
• Save money on a real estate agent’s average 5% commission.
• Don’t skimp on legal assistance or a home inspection.

If none of the options in the section above feel right for your family but you’d still like to help, know that there are plenty of non-monetary ways to help your children in their quest for homeownership. Spending your time and providing knowledge can make a huge difference and help set your child up for success.

Connect Them With Specialists And Resources

Use your time or connections to help your child find qualified experts that can help them through the process. If you have skills to barter, maybe you could help cover their fees as well. This could include:

• Home loan specialists
• Home inspectors
• Financial/investment advisors
• Attorneys
• CPAs
• Real estate agents
• Contractors

Are you one of the above? Volunteer to donate your time and help your child through the process in one way or another. See some great resources below:

• First-time home buyer checklist
• First-time home buyer mortgage guide
• Guide to down payment assistance
• Questions home buyers should ask their lenders
• Mortgage basics and beginner guide
• Mortgage term glossary
• Helpful calculators

Conduct Mortgage And Market Research

Even if you aren’t an expert in the home buying process, you can still pass on anecdotes and advice from your past experiences. You can also spend time helping your child research their area and help them gather the information they’ll need to land a great mortgage. There are a ton of grants and special loans out there to help home buyers.

Some options to explore include:

• First-time home buyer programs
• Special loans like FHA
• Veteran grants and VA loans
• Loans for people with disabilities

Help Renovate Their Home

If you have crafty or contractor skills you could volunteer your time to help improve their home value through various home improvements. You could help out with things like manual labor, organization, painting, landscaping, decorating, upcycling old decor or sewing curtains, cushion covers or other upholstery.

Any bit of help goes a long way and shows your child that you care – there’s no need to feel pressured into providing a loan or cash gift. If you’re interested in co-signing, loaning or gifting in some way, make sure you talk to an expert so that you and your child are set up for success. To get the ball rolling, check out our financial calculators and other home buying resources to help your child start their home buying journey armed with knowledge.

* These are general guidelines only. Speak with an expert to confirm your personal situation.