In recent years, the real estate landscape has undergone significant changes. The Millennial generation, known for its tech-savviness and unique challenges, has matured, and closely following them is Generation Z, a group characterized by its digital nativity and global perspective. Both generations are now at the forefront of the housing market, eager to plant roots and establish homes. However, with escalating real estate prices and rising interest rates, the dream of homeownership seems elusive for many. This is where parents can play a pivotal role in helping their child buy their first home.
Kiplinger's recent article "Four Ways Parents Can Help Kids Be First-Time Home Buyers" offers valuable insights.
HELPING YOUR CHILD BUY THEIR FIRST HOME
Be Their Personal Bank
- Concept: One of the most direct ways to assist is through an 'intrafamily loan.' Instead of your child borrowing from a traditional bank, you act as the lender.
- Benefits: This bypasses the need for your child to meet the often stringent asset and income requirements set by banks.
- Example: Consider Sarah, a recent college graduate with a stable job but not enough savings or credit history to secure a bank loan. Her parents offered an intrafamily loan, allowing her to buy a cozy apartment downtown. They drafted a promissory note and set an interest rate based on the applicable federal rate (AFR) to avoid gift tax implications.
Strategic Intrafamily Loans
- Concept: If your child can't muster the standard 20% down payment, they might face the added burden of mortgage insurance. You can save them this extra cost by providing an intrafamily loan to cover the down payment gap.
- Benefits: This not only saves money but also strengthens their mortgage application.
- Example: James wanted to buy a home priced at $300,000. However, he could only afford a 10% down payment, which meant he'd need mortgage insurance. His parents stepped in, lending him the additional 10% as an intrafamily loan, thus saving him from the extra insurance cost. Remember, as the lender, parents must declare the interest earned on this loan as income.
The Gift of Homeownership
- Concept: Some parents gift money for their child's home purchase.
- Benefits: This can significantly reduce the financial burden on your child and speed up their homeownership journey.
- Example: Emily's parents decided to use the 'annual exclusion gifting' strategy. They gave her $17,000 (the current limit) for her home purchase. Since they contributed, the total came to $34,000 for that year. Over a few years, this amount made a substantial difference in Emily's mortgage.
- Note: A lifetime gift exemption exists for parents looking at long-term gifting. However, it's essential to know its limits and the scheduled changes in 2026.
Be Their Backup
- Concept: Acting as a guarantor or co-signer can be a game-changer for children with limited credit history.
- Benefits: This can help them secure a loan and possibly even fetch better terms.
- Example: When Raj sought a loan for his first home, his lack of credit history was a stumbling block. His parents co-signed the loan, reassuring the bank. Raj got his loan approved with favorable terms. However, a word of caution for parents: if the child defaults on payments, the co-signer is liable.
The journey to homeownership is filled with challenges, especially for young adults navigating today's complex real estate market. As a parent, your financial or advisory support can make a monumental difference. By understanding the various strategies available, from intrafamily loans to gifting, you can give your child a strong foundation as they take their first steps onto the property ladder.
Remember, every family's financial situation is unique. It's essential to consult with an experienced Austin estate planning attorney to ensure that the chosen strategy aligns with both your and your child's long-term goals.
Reference: Kiplinger (June 27, 2023) "Four Ways Parents Can Help Kids Be First-Time Home Buyers"