First Home Struggles: Parents Find New Ways to Help

Getting on the homeownership ladder has never been more challenging. Prices have soared in the past five years; wages haven’t. In expensive housing markets, young adults are approaching midlife with many resigned to renting forever.

Parents, in-laws, grandparents or close friends may want to help young adults become deed holders. But they, too, are daunted by the cost of today’s “starter” home. Parents might have multiple kids, and feel it’s unfair to help one if they can’t give all the same benefit.

So, intergenerational support looks different these days. Here, we explore the ways families are helping each other when they can.

More Common: Generations Buying Homes Together

Per statistics from the National Association of REALTORS®, only a fourth of all home buyers are doing it for the first time. That’s the lowest percentage of first-timers in more than four decades.

It’s not that people largely prefer to rent; many simply have no choice.

Some are staying with their parents longer, working full-time and saving up for a home. Some are even renting from their parents long-term.

Even where two partners work full-time and combine their resources, getting approved for mortgages is tough in this financial environment. Many hopeful buyers are carrying student debt. If their parents aren’t wealthy, they might be priced out for the long run.

Some parents are taking on co-ownership with the younger generation. Often this is the decision when the younger buyer’s assets and income won’t reach the level needed to get a mortgage approval. The lender might insist on the co-signers actually being on the deed, as co-owners.

A co-ownership could be temporary, until the younger owners can refinance and release their parents from the deed. Sometimes, a lender wants an older co-signer to be on the deed as a co-buyer, but the parties understand that the adult child(ren) will refinance the home when they’re financially prepared to do so. In these situations, the parent usually won’t live in the home or make mortgage payments.

Or the co-buying arrangement might become a lifestyle of multigenerational homeownership. Everyone involved in the purchase is named on the property deed. The parties should be prepared to say how they want their ownership percentage vested on their deed:

• As joint tenants with the right of survivorship (JTWROS). This means everyone’s ownership is shared and equal. Upon any party’s death, ownership goes directly to the other named person(s).

• As tenants in common. This arrangement allows the parties to hold their own ownership rights that they may pass down to whomever they name, and to own in unequal shares. For example, the primary buyer might own 90% and the supportive co-owners 10%. Ask the title company how your percentage decision will impact your transfer tax (if applicable) if you’ll later refinance to get the deed into the primary buyer’s name and release the supportive co-owners.   

Important note: According to JPMorgan, many advisers believe parents may use their assets to guarantee a child’s mortgage without triggering the gift tax; but it’s best to check with your own tax professional.

Sharing Is Caring—But Get It All Down in Writing

A co-ownership agreement is essential when parents share resources and responsibilities with the next generation. The co-ownership agreement is best drafted, signed with, and kept on file with a lawyer. A financial planner, alternatively, can support the drafting and handling of the written agreement.

A co-ownership agreement should express key expectations, such as:

• When the adult child will refinance the home and transfer the deed into their own name, if co-ownership is only a temporary situation.

• Whether maintenance and renovations, or any other home-related responsibilities are shared — and if so, how.

• What happens if one party were to pass away or need to leave the arrangement.

• If long-term co-ownership is the plan, how is the equity shared? When the co-owners sell, by what percentages will they divide the sale proceeds?

Creating this document might seem like a nuisance. It will involve extra time and work. But it’s important. Avoid disputes later by sorting out and memorializing your intentions at the start.

Important note: Co-signing means you’re responsible for the mortgage payments if the primary borrower misses a payment or defaults on the loan. Your credit rating is at stake, and could be strengthened or diminished due to your name being on the loan.

The Gifted Down Payment: No Easy Feat These Days

Traditionally, parents who can help will do it by kicking the gift of money into the down payment.

Today, though, many parents of adult children are trying to pay off their own homes and unable to stretch their incomes much further.

Some parents are advancing the children’s inheritances, moving what they would have left in their will into the kids’ needs today.

For those who can contribute, the gift should be reported at tax time. The individual gift cap (at the time of this publication) is $19K per recipient. In other words, there is no gift tax on a contribution of $19K or less. A couple can give $38K total, tax-free. For bigger gifts, givers still won’t be taxed if they haven’t exhausted their lifetime gift tax exclusion (now $13.99 million). Please also check your current state tax rules and caps.

The gift can’t be a loan. There must be no expectation of repayment. The giver needs to write, sign, and submit a formal gift letter stating that the funds constitute a gift with no repayment expected.

Lenders sometimes need to look at a parent’s bank account to trace the source of funds. The recipient can smooth things out by arranging the down payment support as far in advance as possible, depositing the funds, and letting the money season in the recipient’s account for at least two or three months. This way, when the mortgage company asks for the standard two months of bank statements, the money will be a known factor. Ask your mortgage specialist for guidance in advance.

Important note: If the parent expects repayment or any other strings are attached, do not use a gift letter.

Best of Luck to All the Aspiring Deed Holders

Co-signing for younger mortgage borrowers is surging. This is clear from current industry data. You’re in good company if you’re thinking of going this route. Mortgage companies are prepared to offer guidance.

Please remember that the material on this website (or any other) is not personalized legal, financial, or tax advice. Consult professionals in your state regarding your own circumstances, plans, and needs.