Written by:
Steve Stemick
Branch Manager (Lafayette)
NMLS: 544281
First Option Mortgage
View Steve’s Bio

Contents in this Article:

The journey towards homeownership is an exciting life milestone, but for many young adults, it can seem like a daunting task.

With rising home prices, interest rates, and the burden of student loans, first-time homebuyers often find themselves in a challenging position.

As a parent, you may be considering various ways to lend a helping hand. This guide is specially crafted to help you navigate the complexity of such a decision, and explore the various ways you can assist your adult child in becoming a homeowner.

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Understanding Your Financial Position

Before you consider helping your child, it’s crucial to assess your financial capability. While the desire to help your child is admirable, you need to ensure that your actions won’t compromise your ability to sustain your lifestyle, particularly in retirement.

Therefore, you should avoid depleting your savings, borrowing against retirement funds, or leveraging your primary residence. Always remember that your financial health and retirement security should take precedence.

Different Ways to Assist Your Child

When it comes to assisting your child in buying a home, there are several options you can consider:

  • Gifting a down payment
  • Providing a loan
  • Co-owning a property
  • Co-signing a mortgage
  • Buying a property for your child

Each of these possibilities comes with its own set of financial implications, benefits, and drawbacks.
Let’s dive deeper into each of these options.

Gift for Down Payment

One of the most common ways parents help their children is by gifting money for a down payment. The down payment is often the most substantial hurdle to homeownership, and your financial gift can make a significant difference.

However, you need to be aware of the gift tax regulations. The IRS allows you to gift up to $15,000 per person per year without incurring a gift tax. If you’re married, both you and your spouse can gift money, effectively doubling the amount to $30,000 per child.

Providing a Loan

Another avenue is to provide an intrafamily loan at a lower interest rate than what traditional mortgage lenders offer. This approach can potentially save your child hundreds of thousands of dollars in interest. The IRS requires you to charge a minimum interest rate, known as the Applicable Federal Rate (AFR), to avoid triggering gift taxes. However, the AFR is usually lower than typical mortgage rates. Remember, any intrafamily loan needs to be properly documented with a promissory note, and you should report the income from interest payments on your tax return.

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Co-owning a Property

Co-owning a property with your child is another possibility. In this scenario, you and your child jointly own the property, and your contribution would give you equity in the home. When the property is sold, you receive your share of the investment back. The key advantage of this approach is that it allows your child to build their own equity while they live in the house, thereby helping them secure their financial future.

Co-signing a Mortgage

Co-signing your child’s mortgage is another option. By co-signing, you’re promising to make the mortgage payments if your child is unable to do so. However, while co-signing can help your child secure a mortgage, it’s not without risk. If your child defaults on the mortgage payments, it can significantly damage your credit score.

Buying a Property for Your Child

If you’re in a strong financial position, buying a property for your child might be an option. This approach can relieve your child of the financial burdens of homeownership. However, it’s not as simple as purchasing a property and transferring it to your child. Gift tax comes into play in this situation, and if not planned properly, you could incur a substantial gift tax.

Tax Implications of Helping Your Child

Regardless of how you choose to help your child, it’s crucial to understand the tax implications.

If you provide a gift or a loan, you need to be aware of the gift tax rules. If you co-sign a mortgage or buy a property outright, you need to understand the associated tax deductions and potential tax liabilities.

Tax implications

Potential Risks and Concerns

While your intentions may be good, it’s essential to consider potential risks and concerns associated with helping your child buy a home. These could include damaging your credit score, compromising your retirement savings, or dealing with potential legal complications. It’s also important to consider how your help could affect your child’s financial independence and responsibility.

The Emotional Cost

Financial arrangements in families can often lead to stress and conflict. Siblings may feel left out or resentful, and the parent-child relationship could be strained. Therefore, it’s essential to communicate your plans openly and honestly with all family members to prevent misunderstandings or resentment.

The Bottom Line

Helping your adult child buy a home in Indiana is a significant decision that requires careful thought and planning. It’s crucial to consider your financial position, the different assistance options, and the potential risks involved. Remember, while your desire to help is commendable, it’s essential to ensure that your actions won’t compromise your financial health or retirement security. Always seek professional advice before making such a significant decision.

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