Helping a Child Buy His or Her First House
Follow tradition when you help your child buy a home
In some families, it's simply a matter of tradition for the parents to help their child buy a home if they can afford to do so. Just as their parents did, they want to pass along the gift of homeownership to their children. Often helping a child buy a house takes the form of a gift toward the down payment, a lump sum that many young people have difficulty raising on their own while in the early stages of their careers.
While some parents may consider buying a home for their child after he or she graduates from college, it's more typical for such an arrangement to take place after the young person marries or gets that first job.
Smart gifting strategies when buying a home for a child
Tax law permits individuals to give annual gifts to family members and friends of up to $13,000 each, tax-free, or double that amount for a married couple (one married couple can give four times that amount to another couple). These IRS provisions allow parents who can afford it to help children with a down payment on their first house. They just need to remember that these gifts will count against their lifelong gift-tax exclusion, currently capped at $1 million per person.
Some other things to keep in mind when you help your child buy a home:
- The lender may require documentation to establish that the money represents a gift rather than a loan. Otherwise, that outstanding debt would work against the borrower when the lender calculates his or her debt-to-income ratio.
- Some lenders may require that at least a portion of the down payment come from the primary borrower, though that's not typically the case.
Should you co-sign to help your child buy a house?
Even if you've agreed to help your child buy a home with a down payment, you may also want or need to consider co-signing with him. Depending on the child's age, income and credit history, merely helping with a down payment may not be enough to land him a mortgage. New graduates and entrants to the workforce may not have sufficient income or may not have a long enough track record with personal credit to qualify for a mortgage on their own. They may even have bad credit that they have not had the time to repair. In that case, the parent may be asked to co-sign the loan.
If you choose to co-sign for your child, you are taking on the responsibility of ultimately repaying the loan if he defaults. As a co-signer, failing to repay the loan if the borrower cannot affects your credit history just as much as if you defaulted on your own loan. Ultimately it's a personal decision, but it's a good idea to learn more about the ins and outs of co-signing a mortgage before you make your final decision.
Work with a trusted lender when buying a home for your child
Help your child become a responsible homeowner by working with a trusted lender like Citizens Bank. We will work with you and your child to walk you both through the mortgage process. Talk to a home loan advisor at 1-888-514-2300 or start your mortgage application today.