Helping Your Young Adults Buy a Home

The journey to homeownership isn’t easy. Although it’s a significant milestone, the associated costs and long-term commitment of owning a home can be overwhelming—and can make it inaccessible to many young adults just starting out. If you’re in a position to help your son or daughter purchase their first house, it’s a smart way to help them start building equity.  

In the current housing market, with high prices, strict mortgage requirements, and competition on the rise, young adults may not have the proper resources to help them through the purchasing process. In order to qualify for a mortgage, young adults need to have high credit scores, a consistent and adequate source of income, and assets in the bank. They need to jump over many hurdles to buy their first home, and it’s natural for parents to become involved in their endeavors. 

There are different ways to offer financial assistance to a young adult who is buying a first home. While the goal of each approach is to help them build financial security and equity, you should know the benefits and drawbacks of each before making a decision. 

Cover the down payment 
Many mortgage programs require at least a 20% down payment from first-time homebuyers. While there are mortgages that may require less, as little as 3% in certain instances, it’s ideal for your young adults to hit that 20% to secure a lower, more affordable mortgage interest rate. 

Depending on your own savings and budget, it can be beneficial for you to pay your child’s down payment so that they can focus on other future costs. Speak with your family, and then connect with one of our First American Bank loan officers. They’ll take the time to assess your current financial situation and help you determine how you might contribute to or cover the down payment without putting your own financial wellbeing or retirement in jeopardy.  

Before gifting or loaning all or part of a down payment, keep in mind the tax implications. The 2021 gift tax exclusion rate is $15,000 per donor per recipient, meaning that as long as you stay under this annual exclusion, you won’t be on the hook and need to claim the gift in your tax return. If your spouse joins in the gift and you file your return properly, you can jointly make gifts  up to $30,000 tax free to your child and another $30,000 to their spouse. 

Co-sign on a loan
Co-signing on a loan is a way to tie your own credit history and financial assets to your child’s, giving them the financial backing they haven’t had time to earn. If your child is financially responsible and you’ve established mutual trust, co-signing on their loan can help them secure funds for which they otherwise might not be qualified. 

Once you choose to co-sign with your young adult, make sure that you know all of the details and potential risks before signing on the bottom line. If your young adult is unable to keep up with monthly payments, the responsibility will fall on you, which could damage your credit and eat away at your retirement savings.

Cover their monthly mortgage payment
If you’re not prepared to provide a down payment or agree to co-sign a loan, paying a young adult’s monthly loan payment is the next best alternative. With mortgage payments, renovations, and other house-related costs, your young adult will have a large amount of debt to pay off that can be a financial burden—especially for those who are launching their careers or starting a family.  Remember, these payments are gifts subject to tax if they exceed the annual exclusion described above.

By offering to fund their monthly loan payment, you’ll cover a significant portion of their expenses and make sure they tend to other payments, speeding up and improving their financial progress over the long-term. 

At First American Bank, we can help you figure out which funding option makes the most sense. Depending on your financial circumstances, our accessible loan officers can assist your family to help you determine the best path for successful homeownership. Although it is important to discuss these strategies with your tax advisor first, you can use them as guidance when it comes to helping your young adult.

To help your family member get started on their home ownership journey, contact us today

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