Many people I know are buying or have bought their first houses with help from their relatives. It’s great that parents and grandparents are able to help the new buyers out with getting their feet in the door that leads to a great wealth-building opportunity. There are, of course, some issues to consider if you are thinking about taking this path, and Penelope Wang of Money Magazine lays them out on the table.
These are her guidelines for the parents:
- Your own security comes first. Don’t sacrifice a high percentage of your savings.
- Don’t confuse giving with investing. You’re doing this out of the goodness of your heart, not because you’re expecting a return on your investment.
- Sometimes it’s better not to give. If the kid isn’t financially responsible, let him learn discipline by saving and investing on his own first.
If you’ve considered these points and still want to help the buyer out financially, also consider these options:
- Let them live at home. This is common. Kids can live at home with their parents, saving money, until they’ve accumulated enough to buy a house.
- Help them with the down payment. There are some tax rules that you will have to consider, like the $11,000 annual gift exemption. Make sure you check with a tax accountant.
- Cosign a mortgage. This puts you on the hook if the buyers stop paying the mortgage.
- Buy their house. This is the quickest way to make sure the buyers aren’t priced out of an increasing market, but the value of the home is deducted from the $1,000,000 lifetime gift limit.
I am planning my life with the expectation that I will not receive any assistance from family when it is time to purchase a house. My parents are not likely to be in a position to help me out.
Updated February 7, 2012 and originally published April 20, 2005. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.