As a parent, it's hard to watch your kids struggle with anything, but watching them struggle to buy a house can be especially tough. We all want the best for our offspring, and owning a home is one of the best ways to build wealth -- so if kids are having trouble taking that step, it's normal to worry about how they'll manage when you're gone.
The good news is this: There's a lot you can do as a parent to help your kids get their feet on the property ladder. Follow this advice and you'll be able to both assist your children and ensure that your own financial future is secure.
Understand your 'why'
"Because I want to help my child" is a great reason to do just about anything -- but a house is a huge financial investment and responsibility, so you need to dig a little bit deeper.
Ask yourself these questions about your child and their life circumstances, as well as your own financial circumstances:
- How does my kid handle finances?
- Is my kid in debt? If so, how much is that debt?
- Does my kid know how to save money?
- Is my kid living in a real estate market where prices are steadily increasing -- and if they don't get in the door now, they might be locked out for years?
- Do I want to transfer my wealth to my kid now, when they arguably need it most, or would I rather wait? How would that decision affect my estate taxes and other financial considerations?
- Is my kid attending a college where they'll stay for several years? (And would it make sense to buy a house there instead of help them pay rent?)
- Can my kid already qualify for a mortgage? If so, would it make sense to help them qualify for a bigger one?
After you've taken time to answer these questions, you should have a better idea of exactly why you want to help your child buy a house. Whether you want to encourage financial responsibility or help your kid buy a bigger house than they could on their own, knowing why will help guide your decision-making during the process.
Manage your own credit first
It's admirable to want to help your kids -- but not at the expense of your own financial well-being. So before you make any tangible offers to help, make a full assessment of your income and expenditures, your savings and assets, and decide how much you can afford to give. Put a dollar amount on it, and don't be tempted to exceed what you've decided you can spend.
There are a lot of options for helping your adult kids buy that will directly involve your credit, too. For that reason, all of the advice that applies to buyers also applies to parents who want to help their kids buy -- whether you're buying a home to rent to your kid, or co-signing or co-borrowing the loan, you'll want to make sure your credit is in great condition. Don't open a lot of new lines of credit or make any big purchases on credit, and follow all the standard best practices, too, like paying your own bills on time.
And maybe after all this assessment you've come to the conclusion that you don't have a lot of financial help to give. That's OK! You should know by now that parenting is about much more than spending money, so think about other ways you might be able to help, from offering advice, to connecting your kid with a mortgage broker or real estate agent, to cleaning and repairing the home when it's time to move in.
Get your kid's credit in order
A credit score is really important when it comes to a mortgage loan -- it helps the lender figure out how reliable (or not) each borrower is, and it directly influences the interest rate on the loan, which adds up to tens of thousands of dollars over decades.
If your child doesn't know what their credit score, then help them find it, and then work with them to improve it. Maybe your kid has trouble paying all their bills on time, so help them make a budget or set up automatic payments. Settling debts like student loans or car loans can have a significant positive impact on credit score, so if you're in a financial position to clear a large debt for your kid, this might be a good time to do it.
Mortgage lenders are also going to look at your child's bank account statements, seeking red flags like frequent overdrafts. If your kid frequently overdraws accounts, then think about how you might help them balance their finances.
Savings now go a long way later
There are essentially two reasons why you might want to encourage your child to save as much as possible right now. One is obvious: Down payments on houses are expensive, especially if you want to avoid mortgage insurance and put down 20% or more on the home purchase. That 20% of a home's sales price adds up pretty quickly, and most kids probably don't have tens of thousands of dollars handy in their bank account.
Another reason to facilitate savings for your kids is, again, the fact that mortgage lenders are going to want to see bank statements, and it will help your kid's mortgage rate if the lender sees a decent savings account that grows over time instead of being wrung dry every month.
As a parent, there are tons of ways you can help your kids save money, including inviting them to come live at home with you again for a spell, which can decrease their rent payment significantly. If you go this route, then make sure that any agreements you make with your kids about rent and contribution to utilities or household chores are documented and signed.
But you don't have to invite your kids to live at home again; you also have the option of taking over some of their bills (cell phone, car insurance, utilities or others), dropping off groceries or meals, handing down a gently used appliance or car and buying yourself a new one -- there are tons of ways that parents can help subsidize a child's savings account.
Time to buy? Consider all options
Once your kid's credit is in decent order and he or she has a down payment secured, you might not feel like your work is done. Some parents like to chip in with the actual purchase of the home -- and if that's you, fantastic! Just make sure you know what all your options are before you decide on any given path.
An incredibly common way to help your adult kid buy a house is to give them money for a down payment. This is a significant upfront expense for buyers, who may need tens of thousands of dollars to avoid mortgage insurance, and oftentimes parents make that possible.
But backing up your kid's home purchase with a down payment is far from the only option open to parents. Some choose to buy the house themselves, either as an investment rental where the kid can stay for a few years before selling, or as a rent-to-own deal where the kid pays the parents back for the house over time. If you have the ability to pay cash for a house, this can be an especially good deal for both the child and the parent: You can set an interest rate that's lower than what the market's currently dictating (a win for your kid) and make all your money back plus a profit over time (a win for you).
Other parents might prefer co-borrowing or co-signing a mortgage loan. These can be good options for a kid who can already qualify for a mortgage -- often, they can increase their price range with a co-borrower or co-signer. Think about both; a co-signer doesn't accrue any equity in the home and is responsible for the balance of the loan of the borrower defaults, and a co-borrower does accrue equity in the home, but co-borrowing might have a bigger immediate impact on your credit.
Cover your bases
One thing never to forget about adult kids: They are adults, and adults are going to make their own decisions. And some of those decisions might have an impact on your real estate deal.
Decisions that impact your real estate deal go well beyond paint or landscaping preferences. If your child has a common-law relationship or decides to get married while they're living in a house that they're renting from you -- or a house that lists you as a co-borrower -- and things go sour, that partner could have a claim on your real estate, especially if the partner was paying rent or helping with the mortgage.
Make sure that whatever agreements you're making with your kids are thought through in their entirety, and do your best to consider any changes or contingencies that might change the agreement. Document them and incorporate them into any legal verbiage for your own protection -- and to protect your kids, too.