My Parents Want to Help Us Buy a House. Now What?

parents help to buy a home

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Q: My parents want to help my wife and I purchase a house. Should we take them up on their offer and how do we go about it?

A: Long gone are the days of your parents dishing out lunch money and stipend allowances. Now there’s bigger financial fish to fry. Even after you’ve left the nest, parents never stop being parents and what do you do if they graciously offer to help you with your home purchase?

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There are many reasons mom and dad want to lend a helping hand. What’s their motivation? For one, they love you and want to give you the monetary head start to live out the American dream. If your parents own their own property, chances are they want to see you follow in their footsteps, settle down and start cranking out grandchildren. Some may even feel empowered by having the ability to still provide for their adult children and give them a shot at a lifestyle they may not be able to afford on their own. Also, let’s not forget that there could be some tax advantages if the gift is structured appropriately.

So, what are some common ways to go in on a deal with your parents?

1. Gift Contribution Toward the Down Payment

If you’re strapped for cash, but otherwise financially qualified and in a solid position to keep up with monthly mortgage payments, you may only need help with the down payment. Most lenders allow borrows to use gift money from a family member for a portion of the down payment. This scenario is relatively straightforward and will require a gift letter from your parents and proof of funds.

A few things to note when receiving gift money: Typically the banks will only let it slide if you are looking to owner occupy the property, meaning you’re not using the real estate as an investment by renting out the space. Gift givers should also know that the IRS has a max annual tax exclusion of $14,000 per recipient annually.

Accepting a gift that will help you climb the property ladder is nothing to sneeze at. Family dynamics can be complicated enough without bringing money into the equation. Will you feel indebted to your parents? Will they hold it over your head down the road? There is no right answer because everyone’s situation is unique.

2. Providing a Loan

If your parents have deep pockets, but aren’t exactly keen on gifting you the money outright, they may be interested in providing you with a loan. Rather than securing a mortgage from a traditional lender, you tap the bank of mom and dad. This can be a win-win for both your parents and for you. The idea is that you would pay interest on the loan just as you would with a conventional mortgage. This interest provides your parents with a reoccurring revenue stream. Assuming your parents have liquidity to make the funds available, you can position your offer to purchase a property without a mortgage contingency. Not only does this approach eliminate the red tape associated with working with a conventional lender, waiving the financing contingency will also strengthen your offer.

Before you start wheeling and dealing, you’ll want to speak with an accountant. Keep in mind that even family loans are subject to IRS scrutiny and your parents will have to report interest payment earnings as taxable income just as they would with any other interest bearing investments.

3. Cosigning the Mortgage

What if you are struggling to qualify on your own for a mortgage? For example, obtaining a loan may be your biggest hurdle if you have limited or less-than-stellar credit. Mom and dad to the rescue! Generally speaking, FHA and traditional lenders allow for family co-signers, enabling you to leverage mom and dad’s income and credit to obtain a mortgage on your behalf.

As the primary borrower, you will bare the responsibility of making sure that the payments are made on time. If you are late or miss a payment, not only could you ding your own credit, but your parents could also be impacted. If you get into serious trouble with payments, your parents will be on the financial hook. While this strategy may make it possible for you to score your dream home in a more timely manner, it’s not to be taken lightly.

4. Buying the Property Together

Another option is to purchase a home together. This can be a particularly beneficial investment if both parties plan to utilize the space — think two-family home or a single family with an in-law suite. Of course, you’ll want to put all relevant names on the deed as owners. You can decide how to divvy up the down payment and monthly payments and structure a financial solution that works. Similar to the co-sign situation, you should all look at this through a business lens and understand the impact on each other if payments go unattended to.

The Bigger Question is: Should You Accept the Gift?

For generations, parents have been shelling out cash for family loans and down payments, but the trend is on the rise. As home prices continue to climb, more and more baby boomers are opening up their wallets and providing financial assistance. A new report from Digital Finance Analytics (DFA) found that 54 percent of first-time home buyers entering the housing market during Q4 of 2016 received financial assistance from their parents. The average amount given by parents during that quarter was $85,000.

Accepting a gift that will help you climb the property ladder is nothing to sneeze at. Family dynamics can be complicated enough without bringing money into the equation. Will you feel indebted to your parents? Will they hold it over your head down the road? There is no right answer because everyone’s situation is unique.

No matter how close you all are, it is best to put these types of financial arrangements in writing and to consult with an attorney and a CPA for guidance.