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Helping your child achieve the dream of homeownership

Rising rents, housing costs, and student loan debt make it difficult for many young adults to save for a down payment, so families often lend a helping hand.

You remember what it was like to buy your first house. The excitement and nerves that went along with such a big purchase. And the memories you created that turned your house into a home.

You want your children to experience homeownership as well — and they do too — but it’s hard to make that dream a reality in today’s world.

Nearly 75 percent of American adults believe that homeownership is the pinnacle of the American Dream — even more so than being able to retire and having a college degree, successful career, or even children.1

And this consensus is shared not just among older adults. Both Gen Zers (59 percent) and Millennials (65 percent) feel like home ownership equals success.1

Unfortunately, many Gen Zers and Millennials are paying high rent as well as student debt loans, not allowing them to save for a down payment on a house. In fact, student debt is a major obstacle to young people buying a home.2

According to a recent survey by the National Association of Realtors, 37% of first-time homebuyers and one-quarter of all homebuyers were loaded down with student debt that averaged around $30,000. People with student debt (almost 30%) say this debt has impacted their decision or ability to buy their own home.3

With or without student loans, homes are expensive and hard to afford for many want-to-be first-time homeowners. According to the National Association of Realtors, the median price for a home in November 2023 is $387,600, an increase of 4% from the year prior.4 And mortgage rates play a major factor in homeownership affordability. They are a whopping 90% higher than just two years ago.3

That’s why many parents — who are in a financial position to do so — may decide to help their children put money toward the down payment (20%) of a conventional loan. In fact, Redfin conducted a survey and found that 38% of first-time homeowners under age 30 used a cash gift from a family member or an inheritance to use on their down payment.5 That’s a big help, given the fact that a down payment for a $387,600 home would be close to $77,520.

If you’d like to help your responsible adult child purchase a home, there are several options to consider. Here are a few of them:

Give money to contribute to the down payment on their loan, or other expenses

Helping your child come up with a 20 percent down payment on their loan will save them money in more ways than one: You may help them get a better interest rate on their loan and they avoid private mortgage insurance (PMI). However, they can purchase a house with a lower down payment. In 2023, 13% was the median down payment for first-time home buyers. And it dropped to just 8% to 10% for buyers between the ages of 23 and 41.6

The IRS has a set annual gift and estate tax exemption. In 2023, a parent can give up to $18,000 each year to each child without having to file a gift tax return.7

That amount of money could help your child reach their goal of owning a home.

To make an even bigger dent in your child’s down payment, you could gift the maximum over two calendar years. For example, if you gifted $18,000 in December and January to your child and their spouse, it’d amount to $72,000. And if your spouse did the same, the couple could get a total of $144,000.

If you have the means to do so, it’s worthy of consideration. If you don’t, you can still help them avoid PMI with a piggyback loan, aka an 80-10-10 loan.8 The bank provides an 80 percent loan, your child puts down 10 percent, and you put down 10 percent.

Gifting this money to your children now — while you’re still alive — can reduce estate taxes later, after you’re gone. Plus, you get to see their appreciation for your gift now and enjoy time spent together in their new home.

Provide an intra-family loan/private loan

Perhaps you think the more responsible route is to provide your child with a loan. If you do, be sure to put together a legal document outlining the parameters, and a payment schedule.

You might want to hire a real estate attorney to do so.

You will need to set an interest rate, one that is at least as high as the minimum rate set by the IRS. This is called the Applicable Federal Rate (AFR), which is usually lower than the best mortgage rate you could get at a bank.9

Down the road, if you want to forgive a portion or all the loan, you can do so. However, consider any potential income tax issues for you and your child. In most cases, forgiving an intrafamily loan is considered a gift, but you may want to wait for the loan balance to fall below the gift tax threshold ($18,000 in 2024)10 so as not to impact your lifetime gift and estate tax exemption.

Co-sign a mortgage

If your child cannot qualify for a large enough loan, one option is to co-sign their loan application.

Likely this will increase the chances of your child being approved for a loan, but it can be a risky move (if your child takes a financial misstep) and it will impact your credit score.

A higher debt-to-income (DTI) is created for the parent. This could negatively affect their credit score and borrowing potential down the road.11

When all is said and done, many experts will tell you to avoid taking the co-signing route.

Plan ahead

If your child wants to own his or her home, it’s important they start planning for it now. Encourage your child to save money and build a good credit score. And once they’re ready to embark on the home search, encourage them to find a home they can afford. That means they might need to look in different neighborhoods and, in some cases, different states.

As a parent, you want what’s best for your child. However, you must also consider your financial needs, especially as you move closer to retirement. That’s why it’s important that you work with your financial advisor, tax professional, and attorney to help you think through the financial — and emotional — aspects, so that whatever move you make to help your child is a good one for everyone involved.

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1. Huddleston Jr., Tom. "Millennials and Gen Zers do want to buy homes—they just can’t afford it, even as adults,", June 12, 2022.

2. "Homeownership rate in the U.S. 2021–2022, by age,", January 13, 2023.

3. Pal, Meera. "First-Time Homebuyers Face Another Obstacle: Student Loan Repayments,", September 28, 2023.

4. "Existing-Home Sales Housing Snapshot,", November 2023.

5. Fairweather, Daryl "Nepo-Homebuyers: 40% Of Under 30s Received Family Money For Down Payment," Forbes, August 2023.  

6. Green, Dan. "How much down payment do you need for a house?", January 11, 2024.

7.  Wells, Lerner, Mesires Fournaris, Cooper, Pickering, Goosen, "IRS Announces Increased Gift and Estate Tax Exemption Amounts for 2024," Morgan Lewis, November 2023.

8. Lucas, Tim. "Piggback Loan (80/10/10 Mortgage) Rates & Requirements 2024,", January 3, 2024.

9. "Making an intra-family loan?" , January 2024.

10. "IRS provides tax inflation adjustments for tax year 2024", November 9, 2023

11. Lerner, Michele, "Should you co-sign your adult children’s mortgage?" The Washington Post, May 2022

This is a general communication for informational and educational purposes. The information is not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. If you are seeking investment advice or recommendations, please contact your financial professional.

This information is a general discussion of the relevant federal tax laws provided to promote ideas that may benefit a taxpayer. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. Taxpayers should seek the advice of their own advisors regarding any tax and legal issues specific to their situation.

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