How to Help Family Buy a House Without the Drama
As we approach the holiday season many of us are thinking about giving and about our families. We are always looking for ways that we can give and support our loved ones. Every year the cost of homeownership and home prices continue to increase and make it difficult for the younger generations to find ways to purchase a home. These and other hidden costs beyond the price of the home and down payment have made homeownership more and more out of reach.
Society has seen an increase in people purchasing a home with the help of co-buyers such as parents, grandparents, or adult children. It’s difficult for first time homebuyers to compete in this market and many rely on loans from family, or cosigners, or even multigenerational living to make owning a home attainable. How do we weigh the factors and decide which route to take to help our families in these situations without causing drama or hardship? What are the options and the pros and cons?
Should you gift the money?
Gifting money to your kids or grandkids to buy a house is one way to avoid any issues with cosigning on a mortgage. If you want to make sure that the responsibility falls completely on them it’s best to have the asset in their name. This will make them responsible for the upkeep of the property and financially accountable. If they are late on the mortgage, fail to pay taxes or maintain the home it won’t affect you.
How do you do it?
You have the option of gifting the down payment or the full cost of the property as a cash transfer to the recipient’s account. This money is just a gift and shouldn’t come with strings such as a caveat on where the house should be located or which house to buy. Once you transfer the cash you should provide documentation. You will need to write a gift letter to the mortgage company that assures them it’s a gift and not a loan. The letter should have all your contact information, your relationship to the giftee, the address of the property, and a signature. You may also need to provide verification of the transfer.
Should you be a cosigner?
If the family members that you would like to help are young and haven’t had time to build credit, cosigning can help them get approved for a loan. If they are old enough that they should have some credit built up and don’t qualify, this could be a red flag that it could potentially have a negative impact on you. If they miss a payment or have any other issues it will affect your credit score. On the flipside, it could increase your score if they are responsible with their payments.
How do you do it?
Get the full financial picture before you enter into any agreement. Make sure you lay out a plan on paper that clearly outlines how payment will work and when, and what to do if the payer can’t make a payment on time. If the cosigner would like the family member to eventually refinance and get them off the loan, this should also be planned out. This upfront conversation can help prevent any potential unwanted family drama. This needs to be viewed as a business transaction and not a family situation. Being a cosigner is a tricky position and if you can avoid it and enable the family member to have the property in their own name, that would be the least stressful.
Should you all live together?
Multigenerational living is becoming increasingly popular as home prices go up. Living together decreased the amount of debt each person is responsible for and can make upkeep and payments easier to handle. Having more income also means you can buy more house. Sharing a home with adult children or with parents can allow you to live in a better area with more room.
How do you do it?
It’s important to fully realize what you’re getting into. There needs to be a discussion about who pays for what, how things are split and equal say on the housing decisions. The drawback? You will lose privacy and more than likely have some increased family squabbles.
In the end, this decision must be carefully weighed by each individual and decide what the best route is for you, and the least drama inducing. Carefully weighing financial advantages and disadvantages will keep you financially and emotionally safe. Be sure to consult your agent and financial advisors to help you make the most educated decision.
