Clients should proceed with caution when helping kids buy a home
Getting a driver’s license. Seeing car insurance rates mercifully decrease. Buying a first home. They’re all milestones. If your clients are like most couples, they’ve seen their kids reach the first two age-related markers with relative ease.
It’s the last one that’s trickier, so your clients might be inclined to help their adult children, with a down payment on a home.
Without careful consideration of your clients’ finances and that of their adult child, however, problems can arise that have long-term implications for your clients’ financial security.
According to The Project on Student Debt, in 2013 more than seven in 10 college graduates carried an average student debt of $29,400. And from 2008 to 2012, debt at graduation increased about 6 percent each year. http://tinyurl.com/5vp5ee
Added to that debt is a sluggish job market that promises low starting wages and little job security. Those are some of the reasons, The Wall Street Journal says, that first-time owners are a small share of buyers. Citing National Association of Realtors data, the Journal reports that first-time buyers made up just 29 percent of the existing home sale market in April, which is lower than the average of 35 percent since 2008. http://tinyurl.com/km8qjyz
So with all that in mind, the Journal says, your clients need to ask — and answer — some tough questions before jumping in with home loan help. How much is your clients’ help going to cost them, now and in the future? And is this the right time for a young adult to be buying a home?
The most important advice for your clients is this: Don’t give up more than they can afford. That means, says Bankrate, that your clients can meet their own needs now and still maintain for a comfortable retirement that may be not that far down the road. http://tinyurl.com/ovrqqs8
And if your clients are lending their child money, The Wall Street Journal warns, they should be prepared for the prospect of never seeing that money back.
Gift or loan?
Another big consideration is whether the help is a gift or a loan.
If it’s the former, each parent is allowed to give their child $14,000 per year without it counting against your clients’ lifetime gift-tax exemption. If your clients’ child is married, the couple could receive $56,000 total without penalty. The advantage of a gift, the Journal says, is that because is doesn’t add to the child’s debt burden, it shouldn’t hurt the child’s chances of qualifying for a loan.
However, your client needs to make sure the gift is given long before the child tries to buy a home because some banks want to make sure the money isn’t a loan, which would mess up the child’s debt-to-asset ratio.
If the money is a loan, The Washington Times says, get everything in writing and have it checked by an attorney to make sure everything is legal. Included in that document should be the repayment schedule, the interest paid and what the consequences are if the loan isn’t repaid. http://tinyurl.com/odvtkab
Because it’s a loan, your client can’t make it a no-interest note or risk running afoul of the IRS, which could consider it a gift instead of a loan — especially if the amount is more than the $14,000 yearly gift allotment.
The Times also says parents should teach their children about having a financial plan, plus the benefits and risks of homeownership. It’s important in any arrangement that the child is prepared to live in the home for a long time.
Your clients could opt to go other routes, says The Washington Times, such as co-signing a loan; having a shared-equity arrangement; setting up a rent-to-own deal; or just lend the entire mortgage amount to their children.
Co-signing a loan should only be done if the parents are confident their child has stable employment and can meet her mortgage obligations. If the child doesn’t, the parents could be on the hook for the mortgage payments, which could affect their current standard of living and negatively impact their retirement plans.
In the rent-to-own, shared equity or whole-loan arrangements, your clients need to consult an attorney to ensure all the legal contingencies are covered, which can mitigate their risk in the event anything goes wrong.
We hope this information was useful to you, your clients and their families. To get more information regarding this or any related topic, please visit our website www.TEPLG.com or call us at 630-871-8778.
Tags: financial strategies