Owning a home is a significant milestone on the path to achieving the American Dream. Yet many in the post-Baby Boom generations despair that it’s beyond their grasp. A CNN poll reported that 90% of renters under 45 say they’d like to be homeowners but can’t afford it.
It’s no wonder, then, that many Baby Boomer parents want to support their adult children in attaining home ownership. There are many ways to help, but each family needs to research the alternatives to choose the best method that suits their unique financial and philosophical perspective. Here are some ideas for helping.
Return to the Nest
Coming up with a down payment often poses the most significant barrier for young adults in buying a home. While some parents can afford to help directly with down payment funds (see the next section), other parents opt for offering low-cost or rent-free living at the old homestead.
While such an arrangement can help young adults build up down payment funds, it makes sense to consider all the practical angles of the living situation. For example, adult children who have already tasted independence may perceive a loss of autonomy. Parents, for their part, may feel resentful about the loss of their freedom in the previously empty nest. As a result, both parties must discuss in advance how the co-living arrangement will proceed and its duration.
Here are some questions to discuss:
- What spaces in the house will the new “roommates” occupy?
- Where will cars be parked?
- How will food, utilities, and other household costs be shared?
- What are the “quiet hours” in the house?
These and other questions must be addressed from the beginning to set realistic expectations.
Down Payment Help
Some parents have the resources to provide funds, either fully or partially, for a down payment. Bankrate reports that 14% of down payments are gifts from family or friends.
However, this can be a significant amount, depending on the house price and the required down payment percentage, which can vary from zero to 20% or more, with a median of 18%.
Using the median U.S. home price of $419,200 (as of Q4 2024), an 18% down payment is a staggering $75,456.
If the down payment money is a gift, a mortgage lender typically requires a gift letter. This document provides information about the source of the funds and states that it is not a loan that requires repayment. Loaned money would mean the borrower has additional financial obligations that could hinder their ability to make mortgage payments.
Cosigning a Mortgage
Qualifying for a mortgage depends in part on the prospective borrower’s credit rating, which many young adults have not had enough time to build up. Parents with a better credit history can help by cosigning on the loan, which may enable the home buyer to qualify for a larger loan and a more favorable rate.
The downside of cosigning is that if the primary borrower (the adult child) fails to make payments, the cosigner (the parent) is liable. Due to this responsibility, parents must carefully consider the potential financial risks. This may require the primary borrower to share detailed financial information with the cosigner, such as granting access to online mortgage statements and being notified by the lender of any late payments.
Parents as Buyers
Sometimes, affluent parents can purchase property to establish a pathway for their adult child to acquire the home.
This can take a few different forms. One option is for parents to purchase a home as their adult child’s living quarters, with the young adult making payments over time to acquire the property. A downside is that if the parent needs to borrow money for this, a second home mortgage often comes with higher rates and larger down payments.
Another option is co-ownership, where both the parent’s and child’s names are on the title. The parent pays all or part of the down payment, and the adult child pays all or part of the mortgage. When the house is eventually sold, both parties split the proceeds. These arrangements can be complex, so it is best to consult a real estate attorney to draft the necessary paperwork.
Private Mortgage
When an adult child doesn’t qualify for a traditional mortgage, a prosperous parent could act as the lender. While the IRS stipulates a minimum interest rate to avoid a gift tax reporting requirement, these rates currently are less than the prevailing 6-7% 30-year mortgage interest rates.
Other benefits of private loans include the parent lender’s ability to offer more generous grace periods and easier payment schedules. Also, if the deed is correctly recorded with the county, the borrower can deduct the mortgage interest. Parents need to remember, however, that the interest paid is taxable income, and to avoid tax or legal problems, they should enlist the help of a real estate lawyer to prepare the contract.
Selling the Homestead
Empty-nest parents who intend to downsize to a smaller place might consider selling their family home to their adult child. To keep things simple, the best policy is to treat the sale like any other between two parties. This includes fixing the sale price, obtaining a mortgage, and scheduling an inspection.
Many parents may be motivated to set a low price for their child. However, if the home still has a mortgage and sells for less than the outstanding balance, it would be a “short sale” and require additional documentation.
It’s also a good idea to retain the services of a real estate lawyer to handle the paperwork as well as a title company. This will help avoid costly mistakes and protect the interests of both parties.
Parents as Renters
Parents may be able to help adult children with housing costs by becoming their renters. Multigenerational living is on the rise, with nearly 60 million Americans living in households of two or more generations of adults. This trend undoubtedly contributes to the growing popularity of accessory dwelling units (ADUs), also known as “Granny flats.”
Whether an ADU or everyone living together in the same structure, parents paying rent for their living space can help the adult child afford mortgage payments. Additionally, many adult children appreciate being able to keep closer tabs on their aging parents.
Helping with Mortgage Payments
If none of the above ideas make sense, parents could consider contributing toward the monthly mortgage payments. This option is a straightforward way to help adult children afford the costs of home ownership. Explicit agreement at the outset on the amount and duration of the assistance will reduce the risk of hard feelings in the future.
Avoiding Sibling Envy
As with any other type of financial assistance, it’s prudent to consider the equity between siblings. If one child gets help with housing costs, will others expect an equal amount and resent it if they don’t? Perhaps it’s well accepted within the family that one child requires additional support, such as due to a disability. In any case, it’s prudent to have a good understanding of family dynamics when making decisions about helping adult children financially.
Read the previous articles in this series here.
Let’s Have a Conversation:
Have you wondered if you should help your adult children financially? What help would you consider? Are your children able to afford a home? Is this something you might be willing to help?
