As a financial advisor, I often get asked the question of whether or not someone should help their child buy their first home.
While you might answer that question with a resounding “yes,” the best path forward is not quite so straightforward. There is some much needed wisdom to apply first.
Living with prosperity and more than enough financial resources can make you incredibly generous, especially with your children. What parent doesn’t want to help their child succeed and be comfortable? Yet, is it always a good idea to fully fund or significantly contribute to all of your children’s needs and wants?
Your wealth came as a result of hard work, dedication, and an often arduous process of earning money. As a result, you learned the value of stewarding money and managing financial resources. Your children, however, did not go through the same process. They may not understand what your money represents.
Buying a home is one of the biggest investments your children will make. They need to understand the weight of such a financial decision. The last thing you want is your children becoming dependent on your financial assistance throughout their life.
The decision-making process to help your child buy their home will be different for every family. But, a thoughtful approach that aligns with your goals and values should be taken in order to feel like you are actually “helping” your children. Here are a few ideas of how you can help your children buy their first home and still empower them to be financially responsible and independent.
Here are four ways to use your wealth to help your children buy their first home:
1. Make it a simple gift.
Perhaps the simplest way to help your children purchase their first home is to just give them a financial gift. Provide a fixed amount of money you’re willing to offer, no strings attached, just because you want to.
It doesn’t have to be complicated. Some advisors suggest loaning money to your kids to make the home purchase, or even buying the home yourself and having your kids pay you the mortgage. However, you want to empower your children to be financially independent from you, and simply giving them money to make the purchase possible could be the best route to take. It might be the best way to support your children in making one of the biggest purchases in their life without becoming their full financial support system.
If you’re worried about taxes on gift cash, the IRS allows you to give up to $15,000 tax free per donor for each recipient in 2021. If you plan correctly, this could mean up to $60,000 if you and your spouse give to your child and their spouse (4 x $15,000 = $60,000). Note: This annual gift amount of $15,000 can change from year to year. It’s best to talk with a financial advisor to make sure you do this correctly.
2. Offer to match their down payment.
A creative way to give a financial gift to your kids to buy their first home is to offer to match their down payment. This would incentivize them to save up a down payment for their home and put “skin in the game” instead of fully relying on you for the money.
Whatever they save up toward the down payment of their home, you are willing to match it to give them an even greater down payment, hopefully making their monthly mortgage lower in the process – a win-win.
Taking this approach will give your kids a goal to strive for. The process of saving money for a down payment will help them have a much greater sense of accomplishment and a clearer perspective on money management. Plus, they know that by reaching their goal, you will reward them for their hard work. This is a great way to instill financial stewardship and give them a foundation toward wealth building in the future.
3. Help them make a good first home purchase.
Sometimes the best gift you can give your kids is wisdom. Instead of giving them the money to buy or assist in buying their first home, give them guidance. Walk with them through the whole process of saving and buying a home. Help them understand how to select the right realtor. Give them tips to negotiate a commission fee. Teach them to navigate costs around closing. Show them how to shop around for the best mortgage rates and to determine how much house they can afford.
This will do much more than any financial gift could do. As the old Italian proverb goes, “Give a man fish, and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” Teach your kids how to responsibly save up for and purchase a home and you’ll give them the tools to not only purchase real estate again, but make wise, thoughtful financial decisions in other areas in the future.
It’s important to note, once you help them buy their first home, empower them to take full ownership of their decision by simply getting out of the way. Let them make their own decisions and avoid “picking paint colors”, telling them what to do with each space, or showing up at will. Buying a home is a huge step into adulthood, and your actions afterward should support that step.
4. Try to avoid co-signing a mortgage.
Although it’s (unfortunately) commonly advised, co-signing a loan with your child is rarely helpful. It may allow them to get a larger loan and buy “more house,” but is that really what’s best for your kids?
When you cosign on a mortgage with your kids, you take on some substantial risks:
- You’ll become liable for the house payments if your child can’t make them.
- It can be very difficult to get out of the agreement once you’re in it.
- You risk legal implications if they default on the loan.
- Your credit may suffer if default occurs
- You could be responsible for their loan if they go bankrupt or pass away.
It is better for your kids to be able to do it on their own and minimize your risk. However, this decision-making process is different for every family. There may be situations in which co-signing a mortgage with your child makes sense (i.e., your child has no credit of their own). But, if this is the case, as with all financial support, make sure there are parameters attached (i.e., they must refinance and take you off the loan in “x” years, etc.) and that your child does their research to ensure you will not be on the hook for more or longer than necessary.
Get the Help You Need to Make the Best Choice
Like any good parent, helping your child succeed is one of your highest priorities. Helping them buy their first home will give them a huge head start in making wise financial decisions and stewarding future wealth.
If you need help making the best decision toward helping your kids with such a big life decision, come talk with us. Schedule a call today and know you’re making the right move.