How to Help Your Adult Child Buy a Home

Each parents want to help their child when they want to start a new fresh. According to the National Association of REALTORS – “23% of those 37 and younger used a gift, and 6% used a loan from family or friends to purchase their home.” However, there are many other ways parents can help their adult child buy their first home. And this guide will describe home buying advice that saves you time as well.

Is It Important to Buy Your Child a Home?

We have covered the pros and cons of this so that you can consider before making your decision.

If you are thinking about purchasing a home for your adult child, speak to a legal, financial advisor. An expert can help you make the best decision.

Let’s have a look at the pros and cons.

Pros

One of the rewarding things in life is making a home for your child when you do it properly.

  1. If you plan to buy a home for your child, you have to start investing in your child’s future wealth.
  2. You should consider the inheritance tax advantages.
  3. You can think about mutual benefits on the property costs when they plan to pay you back.
  4. As a parent, you can help your children by investing property.

Cons

Most parents argue that the best way is to find their children their way so that they do not depend on their parents. Thus, you should consider a few cons before buying a new home for your adult child.

  1. They may not keep up the damage payments; instead, they will depend on you.
  2. If you do not keep up with payments, you may end up with your retirement savings.
  3. You may not be able to depend on your child or entitlement financially.

If your child is financially dependent and able to start building a new home at a younger age, you may not need to help them. But if they are stuck somewhere, you can assist them. Still, before making your best decision, make sure you think twice or take an expert’s advice.

Things to Consider Before Purchasing a Home for Your Adult Child

  1. Draft a Detailed Agreement
  2. Test How this Could Affect the Relationship
  3. Make Sure Your Estate Is In Order
  4. Don’t Live Beyond Your Means
  5. Don’t Think With Your Heart

 

  1. Draft a Detailed Agreement

You should always make a draft legal agreement so that you and your child feel comfortable. If your child misses a loan installment, you don’t need to pursue a lawsuit. But the main objective of the agreement is it shows the expectations limit of your child that protects you from any unwanted expenses.

 

You may feel strange to yourself if you have a great bonding with your child. But this agreement helps you de-escalate any kind of disagreements over the loan terms.

  1. Test How this Could Affect the Relationship

It’s crucial to consider how gifting a large amount of money to your child could change things since you cannot put the price on any great relationship, especially when it comes to the family bond. Generally, children could feel indebted to their parents, or sometimes they think it has caused stress on their relationship with their parents. That’s why before giving your adult child a big amount, you should talk to them beforehand.

  1. Make Sure Your Estate Is In Order

When it comes to giving money or loan to your child, it is very complicated. Additionally, you should consider how this will affect your financial plan. Thus, consider how you want to provide assistance to your child that won’t affect your financial plan.

  1. Don’t Live Beyond Your Means

It is very important not to give up beyond your means when you want to help your child as much as you want. So. you should make a proper financial plan when you want to purchase a home for your child.

  1. Don’t Think With Your Heart

Last but not least, don’t think with your heart while making decisions. Most parents make wrong decisions since they think from their heart. Make a plan, then execute it.

How to Help Your Children Buying a Home Without Impacting Retirement?

Make sure your costs should not exceed 30% of your income if you are thinking about buying your children a home. This strategy is for the homebuyers who are in the earning years. And when someone wants to purchase their first home in their early 20s or 30s, most likely they have resources from family. First, however, let’s discuss in detail how you can help your child while buying a home.

Strategies to buy your child new a home without impacting your retirement

Provide Loan Via Family Bank

To buy your adult child a home, there are mainly three general ways, these are:-

  1. Co-sign a Mortgage
  2. Provide an Intra Family Loan
  3. Money as a Gift

The most significant advantages created from the intra-family loan are from these three options above. A wealth strategist at RBC Wealth Management–U.S. Mr. Blake McKibbin mentions, “By making the applicable federal rate, usually, parents or grandparents make intra-family loans.” And the rate of the federal is set by the IRS as the minimum interest rate that can be charged to avoid any triggering gift taxes. The best part is that this option helps save thousand of dollars of interest since the rate is significantly below as per today’s rate.

Another best thing for the children is that when they take a loan from their parents or grandparents, this loan doesn’t have the same down payment as banks. Also, the requirements are not the same as loans from traditional lenders, credit checks, or mortgage insurance.

Furthermore, McKibbin also mentioned – that “by leveraging the annual gift tax exclusion, all of the loan or a portion of the payment can be forgiven.” He added – “And per year per family member should have the ability to forgive up to $16,000 in 2022. Besides, the ability to forgive the loan is up to $32,000 a year for married couples. Or if your spouse also chooses to give the $16,000 maximum amount per person, that’s a grand total of $64,000 that can be used to help purchase a home.”

Thus, it is very crucial for the intra-family loan to have proper documents to avoid any kind of tax or legal issues. For example, McKibbin says, to draft a promissory note, you should work with an attorney. Also, make sure you received the income report of your tax return so that you don’t need to run afoul of the IRS.

Another option is co-signing a mortgage loan is an option for parents who want to help children. This can improve the chances of being approved and their strength; remember this. Moreover, this option creates risks on the legal responsibility for the home that directly impact the parent’s credit score.

The Impact of Financial Assistance While Estate Planning or Retirement

Most parents have a dream of making a home for their children. But, as a parent, you should ensure the cost doesn’t come at the expense of your retirement planning.

O’Leary says – “You should build your wealth if it is essential for you to be able to offer that assistance which is very crucial. And this will help you plan for the future.”

An Intrafamily gift or loan can be acted as a form of arbitrage, which is pointed out by McKibbin. However, parents are able to help their children by providing financial support at below-market rates. And parents name the money under the child’s name this has a great potential to increase the value.

However, you can consult a financial advisor to determine which plan would be better for your financial situation. So, appoint a date with the advisor to communicate clearly with your financial advisor to protect your family bonding.