If you want to help your children buy a home there are a number of ways to go about it ranging from family loans to outright gifts. Lofty home prices, rising mortgage rates and a tight inventory of homes for sale have shut many young buyers out of the housing market. In 2022, the median age of home buyers was 53, the highest on record, according to a survey from the National Association of Realtors — which means first-time buyers are delaying their purchases. The typical first-time buyer was 36, also an all-time high.
With that in mind, parents (and grandparents) of would-be home buyers are often interested in helping out. Their options include co-signing a mortgage, jointly owning a home, making a loan, and buying a home outright for your children or grandchildren. Each of these avenues of financial support has its own perks and pitfalls.
First, consider how any assistance could affect family relationships. Your children or their spouses may be anxious or uncomfortable about accepting financial help from parents or in-laws. Siblings’ feelings matter, too. “If you have multiple children, spend some time upfront to understand how giving or loaning to one child might affect family dynamics,” says Mitchell Kraus, a certified financial planner based in Santa Monica, Calif. “We’ve seen years of resentment coming from a small loan to one family member when it was not available to another.”
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Intra-family loans
One option that could benefit both parties is an intra-family loan. You may be able to offer your child a lower interest rate than a conventional mortgage lender would while still earning a higher interest rate than you could earn from a savings account. For example, if you provide your child with a mortgage at a 4.5% interest rate, you’ll earn more than four percentage points more than the 0.23% average yield for a bank savings account. Your child, meanwhile, will pay significantly less than the national average for a 30-year fixed-rate mortgage.
An intra-family loan works especially well for well-off individuals who can afford to give their children the money but prefer the financial discipline that comes with a loan, says Tim Burke, chief executive officer of National Family Mortgage, a family lending agency. “For many parents, the motivation to lend money over gifting it is just about personal accountability,” he says. “Parents feel the responsibilities that come with homeownership, and the satisfaction that comes with meeting these responsibilities builds character.”
That was the case for Mary and Terry Shaffer of Pittsburgh, who lent money to both of their children to buy homes in that city. “Our son and our daughter do not like things handed to them, although they deserve to be helped,” says Mary, 68. “They have worked hard, and they both had accumulated savings for their closing costs.”
If parents need assurance that their child can afford the monthly payments, they should ask the child to get preapproved for a conventional mortgage, Burke says. However, that could be difficult for some children, especially if they’re self-employed borrowers. Even if a self-employed individual’s debt-to-income ratio—the amount of debt you owe as a percentage of your monthly income — may support a loan, a single year in which income declines may cause a bank to reject the application.
If your child can’t get preapproval, it comes down to your judgment. “If you think your family member is not going to repay you, then don’t go through the exercise of setting up a loan that isn’t going to work,” Burke says.
Put the terms of the intra-family loan in writing so they’re clear and it’s an arm's-length transaction, says Brian Lamborne, senior director of advanced planning at Northwestern Mutual. Putting the terms of the loan in writing can also help you deal with instances in which your children are unable to make payments. For example, you can agree ahead of time that should your child suffer financial hardship, payments will be deferred for a certain period of time — perhaps six months or up to a year — and moved to the end of the loan.
The loan agreement should contemplate worst-case scenarios as well. For example, you may want to state the conditions under which the parents could foreclose on the property so they can sell it and pay off the loan.
It’s also important to understand the tax implications for intra-family loans. Borrowers who itemize can only deduct interest on a loan secured by a mortgage if the mortgage has been properly recorded. In order to do that, families need to obtain a deed of trust and file it with the borrower’s local government authority, such as the registrar of deeds or country clerk’s office. A real estate attorney can help you draw up these documents.
If the loan exceeds $10,000, the IRS requires you to charge an interest rate equal to or above the Applicable Federal Rate (AFR), which the IRS publishes monthly. The interest must be reported as income on your tax return.
If you don’t want to act as the loan servicer, you could use National Family Mortgage to set up, document and service the loan. It will email payment reminders and monthly statements, collect and credit payments, and issue year-end IRS 1098 and 1099-INT tax forms. Cost: a one-time fee of $725 to $2,100, depending on the size of the loan, and optional loan servicing starting at $15 per month.
Making a Gift
For some families, the easiest solution is to give children enough money to make a down payment or buy a house outright. Gifting spares families the hassle of a loan and damage to their relationships if a loan can’t be repaid. Mortgage lenders generally allow a relative to supply the entire down payment, but they will require a letter that provides the name of the giver, the amount of the gift and a statement that the giver doesn’t expect to be repaid.
As is the case with a loan, it’s important to understand the tax implications of this transaction. In 2023, you can give up to $17,000 per person to as many people as you’d like without having to file a gift tax return. Married couples can give up to $34,000 per person.
Any amount over the annual limit will reduce your exemption from the federal estate and gift tax. This isn’t a problem for most families because the federal estate tax exclusion is $12.92 million for 2023 or $25.84 million for married couples. However, if Congress fails to extend the 2017 Tax Cuts and Jobs Act, the exclusion will drop to about $6 million in 2026.
In any event, parents or grandparents should only give a gift they can afford without jeopardizing their own financial security. “There are no loans when it comes to your own retirement,” says Jennifer Weber, a CFP in Lake Success, N.Y. “So only help in ways that you can afford now and in the future.”
Other Options: Co-signing and co-borrowing
If your child can’t qualify for a mortgage based on their own income and credit record but can afford monthly payments, co-signing a mortgage is one way to help them buy a home. However, it can be risky.
A co-signer acts as a guarantor for the primary borrower, promising to assume responsibility for repayment if the primary borrower doesn’t pay as required. The lender will review your sources of income and your credit to ensure your income is high enough and your credit strong enough to qualify for a mortgage.
If your child falls behind on monthly payments, your own credit could suffer. Plus, co-signing for a mortgage will increase your own debt-to-income ratio which could make it more difficult for you to borrow for your own purposes. Also, some lenders don’t allow co-signers.
In another arrangement, a co-borrower or joint applicant shares ownership of the loan and assumes responsibility for payments from the start. In general, you and your child combined must put down at least 20%, and your child must cover the first 5% of the down payment from their own funds. Otherwise, the property may qualify as an investment, in which case you’ll be charged a higher interest rate for the loan and be required to have more financial reserves. But If your child fails to pay the mortgage, property taxes or insurance on time, that could ding your credit history or result in a lien against the property.
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