First-time Buyer Tips: Helping Your Children with Their Down Payment

Taking the risk with gifted or loaned home down payments

Increasing costs associated with buying a home combined with new mortgage rules, make it more difficult for first-time homeownership.  At the same time, some parents are counting the cost of lending money to their children. Risky lending has become a term that is affecting the parents of some cash-restricted Millennials. They are those who have accepted or wish to accept significant financial help from parents in the form of “gifted” down payments

It could be a situation in which first-time buyer parents believe their own home has a certain value. However, should there be a market-related adjustment; this value could decrease leaving them responsible for the equity they took from it. A primary consideration is that until the house is sold, the money for their house is not available. Accordingly, parents should make securing their retirement the main objectives before helping their children buy a first home with a personal loan or gift!

Before gifting a down payment

For parents, there are a few obstacles to consider before helping an offspring become a first-time buyer. In the event of parents deciding to sell an investment such as mutual funds or stocks to help with a down payment for the kids, depending on the sum involved, they could be the recipients of a significant tax bill. Another aspect is that if they borrow the money, they will be charged interest and required to pay it back. It is a contributory factor why established lenders discourage “loaned” money rather than gifted, due to the method increasing the debt-to-income ratio for a buyer.

Criteria for a parent making especially a loan or a gift must obviously be related to affordability, which also applies to the borrower and repaying it. Another primary consideration is that a gifted down payment to a first-time homeowner must be directly from an immediate relative. Furthermore, it is accepted that the amount gifted, is a “true gift” and is not subject to repayment!

Parental options

A further option to consider if you want to help a new homeowner is to be a guarantor for the mortgage entered into by your child.  This entails a significant amount of trust in the child, by the parents if they choose this option. It necessitates an honest conversation between parents and the child regarding the affordability factor and their monthly budgeting plan.  Included in the discussion, should be the capability as a first-time home buyer to absorb any unexpected expenses before any agreement is reached.

Buying a property for a first-time homeowner may seem like an adventure; what must be emphasized is that in fact, it’s a determining step in life!