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 babies, 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 and other family members get their feet on the property ladder. Follow this advice and you'll be able to help your family and ensure all of your financial futures.
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First, make sure you Understand your 'why': "Because I want to help" is a great reason, but a house is a huge investment and responsibility, so you lets dig a little bit deeper. Ask yourself these questions of your family member as well as your own financials:
- How do they handle finances?
- Are they in debt? If so, how much is that debt?
- Does my kid know how to save money?
- Is my kid living in a 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 family now, when they arguably need it most, or wait? How would this decision affect my estate taxes and other financial considerations?
- Is my kid attending a college where they'll stay for several years? Does it make sense to buy a house instead of helping pay rent?
- Can my family member qualify for a mortgage? Does it make sense to help them qualify for a bigger one?
- After you've taken time to answer these questions, you'll have a better idea of exactly why you want to help. If you want to encourage financial responsibility or help your kid buy a bigger house than they can on their own, knowing why will help guide your decisions throughout the process.
Secondly, Make sure you manage your credit first:
It's admirable to want to help your kids -- but not at the expense of your own financial well-being. Before you make any offers to help, make a full assessment of your income and expenditures, your savings and retirement, and decide how much you can afford to give. Put a certain limit on it and don't be tempted to push past it. Remember, nobody is going to give you assistance on your retirement like a college or home loan, so make sure you are making progress on your goals before helping any family members. There are a lot of options for helping your adult kids buy which will directly involve your credit. All advice which applies to buyers also applies to parents who want to help their kids buy, whether you're buying a home to rent to them, or co-signing or co-borrowing the loan, you'll want to make sure your credit is excellent. Don't open new lines of credit or make any big purchases, and follow best practices, like paying your own bills on time. Maybe after this assessment you've come to the conclusion you don't have financial help to give. That's OK! Parenting is about more than spending money. Think about other ways you might be able to help: offer advice, connecting them with your favorite mortgage broker or Realtor®, and cleaning and repairing the home when it's time to move in.
Third, Get your kid's credit in order:
A credit score is important when it comes to a mortgage loan, and it directly influences the interest rate on the loan. There are other important parts also such as their debt-to-income ratio, the reliability of their income stream and history of paying. There are ways you can get a loan without credit cards, so don't rack up debt just to get a home loan. Help them find their credit score through free services like Credit Karma or getting their free report from the three credit bureaus. If it isn't great, work with them to improve it and pay off any debts owed. Maybe your kid has trouble paying their bills on time, so help 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. If you're in a financial position to clear a large debt, this might be a good way to assist your family members. Mortgage lenders are going to look at their bank statements, looking for red flags like frequent overdrafts. This is another reason to help them stick to their budget or find 2nd jobs.
4-Savings now go a long way later:
There are two reasons why you might want to encourage your child to save as much as possible. First, Down payments on houses are expensive, especially if you want to avoid mortgage insurance by paying 20% or more down. 20% is a lot and most people probably don't have tens of thousands of dollars sitting around. Secondly, it will help their mortgage rates if the lender sees a decent savings account that grows over time when they ask for bank statements. There are tons of ways you can help your kids save, such as, inviting them to come live at home to decrease their rent payment significantly. Make sure any agreements you make with your kids about rent/utilities or chores are documented and signed. Another option is 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 a family members' savings account.
5-Think about now and the future
When buying a house for a family member, it's important to consider the cost of the home, as well as any ongoing expenses like taxes, insurance and maintenance. You'll want your family members to have a safe home as well as a comfortable home. This is where the emergency fund comes in, for when the roof leaks or when the plumbing backs up, they can repair it. It is recommended by most sources to have 3 to 6 months of expenses in an accessible account. This is to ensure these major expenses are covered when they pop up as well as if someone gets laid off, the basics can still be met. It's also important to think about the location of the property and whether it's in a desirable area. When you are in the process of buying a property, most buyers do not consider the resale value. However, must people move about every three years. So, consider how well the next buyer will like the location of your home as much as you do!
6-Time to buy? Consider all options:
Once your kid's credit is in decent order, they have a down payment secured and an emergency fund, you might not feel like your work is done. Some may want to chip in with the purchase of the home. Make sure you know all your options are before you decide. Common ways to help your family member buy a house is to give them money for a down payment. This can help significantly since it is such a large upfront expense, but far from the only option. 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 adult: You can set an interest rate that's lower than the current market and make all your money back plus a profit over time. Others may prefer co-borrowing or co-signing a mortgage loan. These can be good options for a kid who can already qualify for a mortgage -- and may increase their ability to borrow. Consider all your options since 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.
7-Cover your bases:
One thing never to forget about adult kids: They are adults, and adults are going to do what they want to do. Some of those decisions might have an impact on your real estate deal and your credit. If your child has a common-law relationship or decides to get married while they're living in a house that they're renting or buying 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 the mortgage. Make sure agreements are thought through and consider any contingencies that might change the agreement. Everything in writing is a good moto because it is easy to forget, even when you are young! The agreement then can protect both sides from any later disagreements.
It's a great place to be when you can help by buying a house for a family member to live in. These tips will help you think through the process, but also give your adult kids a chance to have their input and make their decisions. When you are ready to move forward with the buying process, give me a call so I can answer any further questions you may have.