What to Know About Helping Your Children Buy a House
Are you considering helping one of your children purchase a home? With seemingly ever-increasing house prices, it is more difficult than ever for young people to get into the property market. Parents will want to support their children in this difficult step, but is it really a good idea?
As a parent, there are many things you can do, and it doesn't just mean helping kids buy a home. Let's take a look at some of the best ways parents can aid their child to purchase a home. There is more than meets the eye than just forking over a pile of cash.
Boosting Credit Scores
Teaching your kids early on about the value of outstanding credit is essential. Lower interest rates are available from lenders to applicants with better credit scores. Excellent credit also allows higher mortgage sums to be offered to the borrower, as well as lower down payments.
Young people will find it more challenging to benefit from this, as they are going to have a shorter credit background and, therefore, a worse rating. If you have a good financial history, you can help by adding your child to your credit card as an authorized user. Your solid credit history will then be used to boost their rating fast.
Another fantastic way is to teach your kids how to improve their financial standing is to introduce them to a site like Credit Karma. Credit Karma gives you access to your credit reports and scores.
Credit Karma also provides you with data points to break down your credit report to see where this has gone awry and how to fix those issues. It gives you information on how your credit score is calculated and what you can do to improve your credit score over time.
See a complete review of Credit Karma and how it can get you on the right financial track. Let your kids know about Credit Karma so they can see how to immediately improve their credit standing.
Access to Your Savings Account
A similar thing can be achieved with your savings account. The lender will look at the amount of money the borrower has after closing costs. These reserves will show the lender how long the borrower can continue to pay the mortgage if their income was to stop.
The lender will look at the total payments the borrower has to pay each month. This will include mortgage, insurance, and taxes. They then look at the reserves available to the borrower and will see how long they can carry on paying without additional income.
If your adult child is added to your account months before they apply for their mortgage, this will be taken into consideration. You may need to verify, in writing, that they have access to the funds in the account, however.
It is often going to be difficult to raise the down payment, particularly when they want 20 percent of the price. Fortunately, there are many mortgages available where less of a down payment is allowed. To help, you can gift a down payment for your adult child.
This could require you to give proof that you have the funds available. After that, the money will need to be paid into the escrow account or that of your child. Documentation will need to be kept of transfers in case of any issues.
You will also need to provide a letter stating that the money you have given is a gift, and doesn't need to be repaid. Lenders will require what is known as a "gift letter".
Co-Borrowing is Better Than Being a Co-Signor
Another way of helping your children purchase a house it to become a co-borrower. If you become a co-borrower to help your child get a mortgage, you will own part of the property along with the responsibility of making payments on the loan. If you have a reliable income, an excellent credit rating, and assets, this will make the mortgage approval far more likely.
If you were just a co-signor, you wouldn't have any ownership of the home. You could be held responsible for repaying the loan, should your child default, in a clause known as a contingent liability. You should know all of the considerations before co-signing a mortgage with one of your kids. Needless to say, a lot of families have found themselves in a less than desirable financial position when doing so.
Typically being a co-owner is a better route to take than just being a co-signer.
Considering the Risks
There are a few things you need to think about and check before you commit to helping your child get a mortgage. If you are giving a gift for a down payment, there could be issues with the IRS. You may need to pay tax on the gift or other penalties under this arrangement.
When adding your child to credit or savings accounts, you are allowing them to use the money in your account without the requirement for them to make payments. This could potentially lead to arguments if the trust you've put in them isn't repaid. If you feel that this could be an issue, don't let them have a card for the account, so that they can't charge it or withdraw savings.
Taking the co-borrower route could also lead to disputes. To reduce the chances of this happening, it is better to have things written down so that everyone knows what their commitments are and what they have to pay.
If you plan ahead when looking at helping kids buy a home, you should be able to avoid problems. Applying the tips we have given you will make deciding whether to help your kids more relaxed and less stressful. It will provide them with much needed support when their finances are stretched the most and make their future more stable.
Contributing to your kid's purchase of a home is a significant financial step. Make sure you go in with your eyes wide open. Have a heart to heart with your kids and explain the extreme responsibility they are taking on. If you don't feel like your children are ready for the financial burden of owning a home, step back and reconsider before moving full speed ahead.
There is plenty of time for your kids to become homeowners. It doesn't make sense for them to do so until they are really ready, both financially and emotionally.
Hopefully, these tips on helping your children purchase a house has been useful.