Children are living longer and longer at their parents homes before moving out or purchasing their first home. Many of these parents have decided to help their adult kids by gifting them a down payment but this is the only option that parents have to help their grown children obtain their first home.
Gifting seems to be the most popular as this is what lenders look for in a down payment, not a loan for the down payment. "Gifting" means that the applicant does not have to pay back the loan adding to the amount of debt that the borrower has. If the borrower comes up with a large chunk of money, this could put a red flag on the account. The borrower will need to verify the origin of the funds and verify that it does not need to be paid back. However, gifting is not the only option that parents have.
A family loan may also work in lieu of the buyer getting a traditional mortgage. With low interest rates, parents or relatives with additional funds may loan money to a family member wanting to buy a home cashing in on the low interest rate themselves. This can be a win-win for both sides as the parents will receive a higher interest rate than have they put the money into a CD or savings account and the adult children will receive the loan. However, family loans need to be "arm's-length", which means they must prescribe to the IRS's interest rates based on the term of the loan. If the relative is not concerned about earning interest, they could forgive up to $14,000 in interest per year under what's called the "gift tax exclusions".
Another option would be cosigning on the mortgage. If the adult child income is too low to qualify for a mortgage they could have the parent cosign. If the parent or relative can take on the obligation, they would essentially be a co-borrower to the loan and have as much stake in the property as the original borrower. The downside to this is that should the borrower default, this will show up on their credit as an outstanding loan obligation, and it could complicate refinancing or other loans in the future.
If you're interested in learning more about the opportunities for co-signing or helping your adult kids buy their first home, please contact me anytime.
As a certified Realtor® for the top-rated Columbus Realty Firm - Vision Realty, with 32 years of dedicated real estate experience, I can help buyers, sellers, investors, short sale sellers and more find, sell or invest in the right property, at the right price, at the right time. Contact me anytime for updates and information on the Columbus OH Real Estate market.