This has been mentioned in several threads in one form or another. Some people buy their kids a house outright, making the point that they’d rather the kids benefit from the parents’ assets now rather than after they are gone. Some people have mentioned giving their kids a down payment. Some have bought a house in their names, making the down payment but expecting their kids to pay the monthly mortgage.
I’m wondering the plusses and minuses of each plan. I don’t want a debate/judgment of whether this is a good or bad idea. I’m looking for nuts and bolts of how people made their decisions and maybe things to think about before you do it. TIA
Our kid bought a townhouse. He could have qualified for a loan with his own savings, but we wanted him to not have to pay PMI…so we added to his down payment.
Advantage…it gives him a pretty fixed housing cost per month. His rent almost doubled between 2019 and 2021.
I did not do this. However, my adult kid noted that the mortgage application for the banks they (kid and spouse) borrowed from --they bought a house and sold it to buy a larger one a number of years later–asked if anyone else had contributed to the down payment. They could truthfully say no.
Apparently, some banks are less interested in loaning money to people who needed help with the down payment and/or charge a higher rate.
So, just check the mortgage application if you’re helping with the down payment.
I fear one day this is coming- and I’d love to help a kid out.
My question would be - if they are married, are you in essence not just gifting your kid but their spouse - who may or may not be a forever one
I’m not there yet but that goes through my mind - that if they split, the spouse is taking half of “my” money.
I’m sure there is a way with legal documents to protect against that although then that causes the issue of - you don’t trust us, you don’t think we’ll last, etc. etc.
If I were the spouse of a kid, I would not be willing to make payments on a house in my in-laws name. Plus the kids aren’t building any equity or credit in that scenario, just the parents are (at least on paper).
IF I was going to do something like this, I would go with the scenario of paying for enough of it that it made the payment more manageable for the kids. BUT, you are gifting both your kid and the spouse, if there is one.
I think if you are able to help your kid out with a down payment, it is a great leg up for them. Most banks would want to know it is a gift, not a loan. It is very hard for many young people to save up for a down payment. My parents were not able to help me, so I know how difficult it was for me. But once I was able to come up with my first down payment then buying/selling another property was much easier.
They have to ask. The bank needs to know where the down payment came from and the debt to income ratio. If a buyer ‘suddenly’ has a $50k down payment but didn’t have that much saved a year ago, the bank needs to know why. Did the person steal it, borrow it from another person, does that loan have conditions, etc., was it a one time inheritance, a signing bonus for a new job, a game show prize?
It doesn’t mean the bank doesn’t want to lend the money, they just have to know that repayment to the bank is first priority and the buyers won’t be strapped because they have to pay not only the mortgage but a check to a parent (or two) to repay the loan.
It used to be common to do a double mortgage to avoid PMI - take a loan for $10k or $20k and then add that to the down payment, but roll both loans together for one mortgage payment. The isn’t allowed anymore by Dodd-Frank (and a lot of other practices that contributed to the 2008 crash). Thus the PMI requirement.
Of the 3 options OP listed, I think different ones are going to work for different families. If the parents have an extra $500k, go ahead and buy the house outright, fill out the gift tax form, and sit back and hope for grandchildren. If the parents only have $100k, maybe that’s a down payment. If they can only contribute a smaller amount, top off the down payment amount, pay for the garage in a ‘new build’ situation, gift something else like furniture, a heating system.
Anything helps. I wish I could do that for my kids.
I guess this is where you could ask for a prenup or post nup for the couple to protect the money a set of parents are contributing.
We are not in a position to give a substantial gift to our children. Both of them have great jobs with no college debt so they were able to contribute to retirement and a down payment.
My parents were never in a position to contribute and my in laws weren’t when we were purchasing our first home. They are now but have continued to make a choice not to gift their children money.
My parents gave us about half the down payment and the bank required them to write a letter saying it was a gift not a loan. It meant we didn’t have to get mortgage insurance. My husband and I are on the same page about doing the same for our youngest if he should ever buy a house. (Oldest kid is happy renting forever and frankly has more money in the bank than he knows what to do with. He’s lived in the same one bedroom apartment for ten years.) I don’t plan to worry about possible divorces. Right now we love our DIL and if they have kids and she ends up with a house with our grandchildren without our son that seems like an okay outcome to me!
We are planning on gifting our D the downpayment but only after she’s obtained the mortgage. We want her to qualify on her own assets and build her credit score making her mortgage payments. After she’s closed, we’ll gift her back her downpayment so she can use the money for investments, safety net, or whatever. That way we don’t run into any issues with the bank/mortgage process and the house is hers outright. (At least that’s what we are thinking now).
We sort of did the same but in reverse. We didn’t want our kid to completely empty his bank accounts to come up with the whole down payment. He would taken it from his emergency fund…and we just didn’t want him to do that.
So, we gifted him money before his closing. The townhouse is his outright. Our names are not on the mortgage or the deed.
Thanks, all, for the replies. To clarify … gifting the money doesn’t mean the bank is less likely to give a mortgage, they just want to know?
In our instance, we definitely don’t have enough money to gift outright, and there’s no spouse so that’s not a complication, though I feel like @Silpat in terms of a gift is a gift.
I was talking to some friends, all of whom wished they had bought houses for their kids in their college towns when they left home four years ago. We all think of smart things to do financially, but we rarely act, kwim? I’m thinking if there is a bit of a downturn maybe ds2 could find a deal in his current town.
I don’t think it makes sense to buy a house in a college town unless you want to be a landlord after your kid graduates. Of course it depends on a real estate market if it’ll appreciate over 4 year period, but most of the time with closing costs and real estate agent fees it would be hard to get a very high return in a short period.
We did a down payment plus a HELOC to buy our first house. We were in our late 30s and the kids were already in school – no assistance from either set of parents. Were able to avoid PMI that way, and we paid the HELOC off in a couple of years. Also enabled us to keep a nest egg in savings rather than being house poor. Also probably helped that we weren’t pushing the limit on what we qualified to purchase.
Am mulling ways to make housing in the US more affordable for S2 and his SO (soon to be fiancee?). They live in her home country and can rent a nice 2BR for $450/mo. Salaries reflect the low COL. They’d be totally priced out here. If they decide on a hybrid of working 6 months here, 6 months in her country is feasible, then maybe we broach staying at our house and contemplate an addition. We can’t swing a down payment for them that would make the mortgage anything close to reasonable.
My older S wouldn’t care if we did that for S2 (S1 bought a house two years ago in SV and didn’t need anything from us). I’m finding “warm money” a more appealing concept these days, though we have to see what the markets do.
I have friends who’ve done it and still have the house long after the kid graduated. She was in a sorority, and it’s basically now handed down from class to class. Has worked for them. I couldn’t have afforded it back in the day.
Son and his wife just bought in DC (subject to the home inspection). They didn’t ask for any help with a down payment and we didn’t offer. We just gave them a few thousand earlier this year though to help with their wedding costs . I do plan to give them a couple gifts after they close on the house, but nothing major.
