How To Help Your Child Buy a House
Helping your child buy a home is a great way to lend them a hand. There are real financial benefits for both you and your child—but there are also risks involved.
Written by Patrick Price
Reviewed by Melanie Reiff
Given the extraordinary difficulty young people now face when trying to purchase their first home, many parents offer to lend financial assistance. This can be a huge help to the child and, in the long run, a canny financial maneuver for the parents—but there are serious risks as well.
Today's housing market is a nightmare for young adults. First-time homebuyers find themselves staring down an insurmountable combination of rising house prices, rampant inflation, strict mortgage lending practices, and record-high student loan debt.
There are many ways that you can help your child buy a house. Whether you decide to buy the house yourself and rent it to them or simply give them a cash gift, there are always going to be risks and benefits involved.
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Ways to help your child buy a home
If you’ve decided to help your child buy a home, you should carefully consider how to proceed. There are several ways that you can lend a hand—each one has advantages as well as drawbacks. Most parents who help do so in one of the following ways:
- Buy the house yourself and rent it to your child: One approach is to simply purchase the home under your name, then rent it to your child. They can pay off the mortgage through their rental payments.
- Supply part of all of the down payment: If your child has sufficient credit to warrant a mortgage, they’ll still need a pretty sizeable chunk of cash to make a down payment. You can always supply them with a cash gift to be used for this purpose.
- Co-own the home: If you purchase the home with your child and have both names on the deed, they should have a much easier time securing a mortgage—much like cosigning on a lease.
- Finance the home: You can also decide to finance the home for your child. This way, you’ll in effect become their mortgage lender. You can even draw up a mortgage agreement to make it official.
Buying the house yourself
This method is pretty straightforward. If you have the financial ability to do so, you could simply purchase the home yourself. Then have your child pay the mortgage through monthly rental payments. Once the mortgage is paid off, you can sign the deed over to them. Or, hang onto the property—when they move you could sell it for a potential profit!
This is an especially helpful approach for the child because it does not put their credit at risk in any way. Of course, if they don’t keep up with their payments, you could be on the hook for a pretty serious financial obligation. You don’t want to end up paying two mortgages!
Potential tax savings and complications
You could end up saving a good bit of money on your taxes by using this approach—but you have to do it just right. Owning the home and making mortgage payments on it would qualify you for the Mortgage Interest Tax Deduction. This allows you to deduct the cost of mortgage interest from your taxes.
Keep in mind that you have to legally own the home and be the one making the mortgage payments to qualify for the tax break. If your child is making the mortgage payments directly, then neither one of you will qualify. Some people work around this by having the child pay them rent and using the money to make mortgage payments themselves.
You also can deduct other expenses related to the second home such as property taxes, maintenance/repair costs, and more.
Additional costs of owning a second home
It’s prudent to remember that owning a second home comes with some additional expenses. Mortgage lenders will offer much less generous rates for a second home. Plus the down payment will be significantly higher. Homeowners purchasing a second home typically have to pay at least 20%-30% down. You’ll also be hit with much higher interest rates.
MORE: How to settle into a new house
Providing a cash gift for the downpayment
Another approach is to simply give your child the money for a downpayment as a cash gift. Saving the money for a down payment is one of the biggest obstacles for young people looking to purchase their first home. Providing them with the funds for the payment could be enough to allow them to qualify for a mortgage.
This, of course, comes with risks. There is no guarantee they will use the money for a down payment as they are under no legal obligation to do so. Once you give them the money, they are free to use it however they like, so it would be smart to have that conversation with your child upfront.
Tax implications and gift limits
There is a limit to how much you can gift your child without it affecting your taxes. The law permits you to give $16,000 per donor for each recipient.
Let’s say you and your spouse decide to give your daughter and her husband a cash gift for their downpayment. You and your spouse could each give them each $16,000 for a total of $64,000 ($16,000 x 2 recipients x 2 donors). This amount will not require any additional tax maneuvering and it will not count as taxable income for your child. The next year, you could also give them another $64,000 without tax repercussions.
If, however, you exceed this amount, both you and your child will have to fill out IRS Form 709 and include it with your taxes. This will also have implications for how much you can bequeath to them when the time comes.
Co-owning the home
You also could co-own the home with your child and have both names on the deed. This can be risky though since you will be equally financially responsible for the mortgage. Just like buying the home yourself, you’ll need to be confident your child will stay up to date on their payments.
Financing the home
Some parents decide to finance a home for their child. If you do this, you’re essentially loaning them the money for the home. Basically, you are acting as the mortgage lender. It’s a good idea to get an official mortgage agreement in this scenario to limit your financial risk.
One major disadvantage of this approach is it will subject you to additional tax liability. Even if you don’t charge your child any interest for the loan, the IRS assumes that you are profiting and will tax you accordingly.
MORE: How to make a counteroffer after a home inspection
Should I help my child buy a home?
Providing financial assistance to your child as they buy a home is a tricky business. There are very real benefits and drawbacks associated with doing so.
The risks
The first thing you should consider is your own financial position—you don’t want to put yourself in dire straits.
One big mistake parents make is raiding their retirement fund to help their children. Helping with a home purchase is an investment and things can go south. You don’t want to end up without the money you need for a good retirement because you didn’t recoup your investment. You’ll need to be very objective about the financial responsibility and reliability of your child.
Another concern is the emotional complication of lending money to a family member. Everyone would like to help out their children as much as possible, but financial transactions within a family can be complicated. If one party does not hold up their end of the bargain, things can become tense very quickly. This can lead to strain on your relationship with your child.
The rewards
While risky, helping your child buy a home has some serious potential benefits, both emotionally and fiscally.
For starters, you get the satisfaction of knowing you’ve helped to put your child in a good home. This is a huge boost for them on their road to financial security and stability.
In addition, you could be doing yourself a financial favor. Many of the approaches listed above have real tax benefits for the parents involved, so you could save a chunk of change year-to-year.
More than this, a house is an appreciating asset. As the mortgage is paid off and equity grows, you, your child, or both will have an ever-increasing stake in the property. Most homes tend to go up in value over time so, if you ever decide to sell, you could stand to make a bundle!
MORE: 10 best companies for home and car insurance
Finding affordable homeowners insurance
Once you’ve secured a home for your child, you’ll need to get it insured. Quality home insurance is absolutely essential for any homeowner. It is a critical step in protecting the huge investment that the home represents. More than that, most mortgage companies require it as part of the loan agreement.
Luckily, this is one area where you won’t have to shell out a ton of cash. Finding affordable homeowners insurance is faster and easier than ever before thanks to the revolutionary automated insurance broker app
Jerry
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Jerry can also help you bundle your home and auto policies for a discount on both! While you’re at it, take moment to review your own home insurance. The odds are very good that Jerry can find your equal or better coverage for a fraction of the cost–and switching only takes a few minutes.
“I just moved out of my parents’ house, so this was my first time having to buy insurance.Jerrymade it simple and painless to find a plan. Yay!” —Vic L.
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FAQ
Can my parents finance a house for me?
Yes. The IRS does allow parents to give their children home loans. But it will have to be an official agreement with proper documentation.
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