Helping Your Adult Child Buy a Home

Buying a home for your child is a major financial and emotional decision. It’s a generous gesture that can offer security, stability and help create wealth, but it’s essential to carefully weigh the pros and cons before making this commitment. Here are some important factors to consider:

Assess Your Financial Situation
Before anything else, ensure that purchasing a home won’t put undue strain on your finances. Consider how this purchase fits into your overall financial plan, including your retirement goals. Be aware of the tax implications, particularly if the home is a gift. It’s wise to consult with a tax advisor to understand how property taxes and potential gift taxes may impact you.

When it comes to financing, you have several options: buying the home outright, taking out a mortgage, or co-signing a loan for your child. Each option has its own implications for your credit and financial situation, so choose the one that aligns best with your goals.

Here are a few ideas, for starters:

• Co-sign on a mortgage. When you co-sign, you are doing just that: co-signing on the debt. This option works if your child has good enough credit to qualify (lenders will use the lowest mid-score of all borrowers on the mortgage). Co-signing doesn’t “fix” a bad credit situation with your child. Your income, debts and credit are factored in with your child’s income, debt and credit. In order to be removed from the mortgage and/or deed in the future, it’s likely your child will need to refinance and have a deed recorded. The mortgage debt may impact your credit scores and potential to qualify for additional debts in the future.
• Assist with down payment. Another option to help your child buy a home is to help with the down payment or closing costs. These funds would typically be considered a “gift” to your child. Some parents treat this as an early inheritance, if they have the funds available. When you’re gifting funds for the down payment or closing costs, the mortgage and deed are typically in your child’s name only so they will need to qualify for the mortgage on their own.
• Buy the home as an investment property. You could purchase a property as an investment property and then rent it to your child. Perhaps you could even create a “rent-to-own” arrangement where you dedicate a portion of their rent to a savings account to go towards buying the home from you. This option allows you to maintain control over the mortgage (protecting your credit) and over the asset (the home).
• Have your child get a roommate. If the roommate pays your child rent (and it’s well documented) for about 12 months, they may be able to use that rent to qualify for their next purchase. The only possible catch is that the said roommate needs to move with your child to the new home.
• Add an accessory dwelling unit to your current home. You could either convert a part of your home, like a basement or garage, into an accessory dwelling unit or you could possibly build an accessory dwelling unit (DADU) on your property, depending on what your zoning is. Many neighbors in Washington state qualify to have ADU’s with recent changes to our zoning regulations. Heck, some people have built ADUs and opt to live in the ADU, allowing their kids to move into the primary residence!

Understand the Legal Implications
Deciding how the home will be titled is crucial. Will it be in your name, your child’s name, or jointly owned? Each option has different legal and tax ramifications. Additionally, think about how this purchase fits into your estate planning. If the home is in your name, you’ll need to consider how it will be passed on to your child in the future.

Keep in mind that if you hold title to the home, you may also bear liability for any issues related to the property, such as accidents or unpaid bills.

Think About the Long Term
It’s important to consider the long-term viability of the home. Is it in a location that will retain its value, making it easier to sell or rent out in the future if needed? How long do you, or your child, plan on retaining the home? How long will it take to break even on the home as compared to your child renting?

You’ll also need to determine who will be responsible for ongoing maintenance and property management. Reflect on your child’s future plans as well. Will this home continue to meet their needs as they grow older or if their circumstances change?

By considering these factors carefully, you can make a well-informed decision that benefits both you and your child. If you’re considering buying a home for your child and want to discuss your options, feel free to reach out. I’m here to help guide you through the process. It’s never too early to start creating a plan and to explore the possible options.