By Chris Birk
Younger, first-time homebuyers are an increasingly rare sight in the current housing market. The homeownership rate for the 35-and-under crowd fell to a 22-year low in the second quarter, according to the Census Bureau. A bounce might loom on the horizon as lenders start to loosen credit and underwriting requirements. Even with a broad thaw, it'll still be tough for many first-time buyers to build the credit and liquidity needed to secure home financing.
That has some parents wondering whether they can -- and should -- help their kids purchase a home. It's certainly not a new concept. Parents have helped their children for decades with down payments and even loans. But recent economic and mortgage-market realities have made the question more acute. Whether you should step in is a question only parents can answer. Here's a look at a few common approaches if you decide to help.
1. Down Payment: Help About a quarter of all first-time homebuyers used gift money for their down payment last year, according to the National Association of Realtors. Parents are the most common source.
There are potential tax implications to consider. Individuals can currently make tax-free gifts of up to $14,000 per recipient. That means Mom and Dad could give as much as $56,000 to their child and a spouse before hitting the IRS's annual cap on tax-free giving.
Anything above those limits requires reporting to the IRS. But you can certainly give more. The good news is you won't have to pay taxes until you bust through the lifetime gift exclusion, which now sits at $5.34 million.
Lenders will have specific guidelines for how to document and source gift funds. They'll also want to see in writing that this is a "no strings attached" donation, and not a loan to be repaid.
Depending on the type of loan and gift amount, children may need to contribute some of their own money to the cause.
2. Parents as Co-Signers: Parents can also co-sign on a mortgage with their child. Some loan types, like VA home loans, have occupancy restrictions, but there are plenty of options for co-borrowers who don't actually plan to live in the property full time.
Helping with a down payment is one thing. Co-signing on a loan exposes parents to significantly more risk when it comes to their credit and financial profile. A child who misses a mortgage payment or winds up in default could wreck their parents' credit for years.
No one expects to lose a job, get divorced or face some medical malady. Anything that affects your child's ability to make good on their obligation means the full responsibility falls to you. That may or may not be financially feasible for some parents.
3. Buy in Cash: This may be even less financially feasible, but it's certainly the simplest approach: Buy a house in cash. There's no credit review, no lien and no lingering financial obligation. All-cash sales accounted for almost a third of home purchases in June.
How parents proceed from an all-cash closing is their call. Some set up a rent-to-own or equity-sharing arrangement. The property can serve as a long-term investment, especially for parents of young adults who may not feel tethered to the community.
4. Parents as Lenders: A less common approach is to act as your child's personal mortgage lender. Parents with the liquidity for an all-cash purchase can opt to draw up their own mortgage and repayment plan, likely with the help of an attorney and a financial planner.
There are federal guidelines regarding interest rates on loans like this, which is all the more reason to consult financial and legal experts. This kind of arrangement can generate interest income for parents, while getting kids into a loan with a lower rate than they'll ever find on the market.
No matter which route you choose, it's important for anyone who takes on a mortgage to know the risks -- and benefits -- that come with it. Not to mention that if you do go through a traditional lender, you'll need relatively good credit to do so. Once you have a mortgage, making payments on time every month will go a long way in building good credit, while falling behind can do a lot of damage to your credit. Keeping an eye on your credit scores can help you track your progress, and show you how your debt-related behaviors affect them. You can get two of your credit scores and a breakdown of what's influencing them for free through Credit.com.