There are crucial things for parents helping their children become homeowners to consider, specifically with financing, whether or not parents are gifting or loaning their child money.
If it’s a gift, most financial institutions require a gift letter. That’s important if things break down before the house gets sold. If it’s a loan, the money can be secured against the house often in second position, if parents are worried about that.
As exciting as it can be to help our kids purchase their first home, parents also have to be cognizant of not overextending themselves and compromising their retirement. Spending a large amount of money could jeopardize investment goals or even a much-needed renovation in their own home.
Another way to help your child purchase a home is to go on the title as a guarantor or co-signer but this comes with different responsibilities. A co-signer on the property’s title is 100% responsible for other people should anything happen, and if they refuse or can’t pay, the co-signer is 100% responsible for the property. They’re on the hook.
A guarantor doesn’t go on title, but there’s no recourse should anything happen to the home BUT they’re still 100% responsible for payments, again, should anything happen to the home. It’s most likely we’d go to them if payments are required.
In the event of tragedy or unforeseen events, planning ahead prevents a lot of headaches and more important than money is the relationship between parents and their children. Make sure you run the numbers before making any decisions. Individuals with greater assets should think about an inheritance later versus a gifting now....what would be more useful? If they’re thinking about what their estate will look like, taxation is part of the equation because you will pay a large amount. If you want to get around it, you can confront the tax liability now, meaning you can incur the liability now for whatever it will be on the inheritance later and the end result is you’d more than likely be net ahead for the estate. Sometimes giving money to your kids before you get to that point can have a positive result on what you want for your estate.
Also ensuring your children are making smart decisions with their purchase that their lack of life experience may not allow them to make....are you buying in a good location? Is the home layout functional and good for resale? How much work does the home need and is your kid able to do the work him/herself to build equity? Will the monthly costs of the home (property tax, utilities, etc) be within their budget? Sit down with your kid and go thru all of these items...they may be surprised with all the details they have not thought of!
Bottom line, we want our kids to be happy, succeed and be set up for a great future and taking all the above into consideration will definetly give them a great start!