First-time home buyers expand their options with help from Mom & Dad
December 17, 2018 | Dwell JC
In my last article, I shared information regarding how first-time home buyers were able to buy fixer-uppers with renovation mortgages offered by HUD and Fannie Mae. But another first-time buyer I worked with this summer turned to Mom & Dad for the down-payment. More and more parents are helping their grown kids become homeowners, which can really give them a leg up—particularly in this pricey housing market.
According to Student Loan Hero, the rising cost of student debt is causing students to postpone buying a home. “Between rising home prices and millennial student loan debt, many young adults don’t have money to buy a house,” says Todd Sheinin, mortgage lender and chief operating officer at New America Financial in Gaithersburg, MD. “That’s where parents can help out.”
If you are a parent looking to help your child buy their first home, it may not be as straight forward as it sounds. Aside from the usual planning and steps common to buying any home, here are some additional considerations.
Gift the down payment money
When you contribute funds to your child’s down payment for a mortgage, the money can be classified as either a loan or a gift. You’ll need to consult your tax accountant as this decision as tax implications.
Remember gift money can be transferred tax-free up to $15,000 for 2018. So, for parents, that means each parent can gift $15,000 to their child and their child’s spouse tax-free, for a total of $60,000.
Along with providing your lender with a gift letter, where the parent swears on paper that they will not ask for the money back, you may also need to provide a paper trail verifying where the money is coming from.
Buy and co-own the house
Another approach is for the parent to purchase a home with their children and co-own it with them. In this way the parent and child are purchasing the home and dividing the equity. When the house is sold, the parent gets their share of the money back. This strategy works well if the plan is for the child to purchase the parent’s share in the future.
It is not a good idea for parents to withdraw money from their IRA or 401(k) before age 59½ to help finance their child’s home purchase. There is a 10% excise tax on the amount withdrawn, on top of the regular income tax you pay on withdrawals, plus you will not accrue the future gains on the money withdrawn. Again, consult your tax professional before heading down this road.
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