Should You Help Your Child Buy a Home?
How to make a decision and set ground rules that minimize stress
En español | For 65 percent of young adults, homeownership is part of the American dream. But can they afford their own home ... with or without help from you?
Last year, millennials, median age 30, comprised 35 percent of homebuyers — up from 32 percent in 2014, according to the National Association of Realtors. While it's possible to buy a starter home in Chicago for around $100,000, the price jumps to well over $200,000 in the Northeast corridor and double that in California coastal cities.
Because of the price tag, a significant number still can't afford to buy a house. A recent survey of 30,000 millennial renters found that more than three-quarters listed affordability as the top reason they will delay a home purchase. And many "significantly underestimate by 50 percent or more" the amount they need to save for a down payment. As a result, almost 60 percent of millennials don't plan to buy before 2019.
When it is time to buy, many turn to the bank of Mom and Dad to help close the gap. A survey found that 17 percent of parents expect to help their children buy a home over the next five years by assisting with the down payment. Before you make such a move, Lauren Locker, a certified financial planner from Little Falls, N.J., offers these points for parents to consider:
Can we afford it? No matter how much the request, parents need to calculate not only if they can spare the cash, but how it will affect their financial future. Suppose a loan is not paid back?
Why can't my child afford it? Are they spending too much money? Are they in debt from student loans or other expenses such as credit card bills or auto loans? What's their credit score? "Suggest they ask a financial professional to go over their finances," Locker says. Sometimes they are urged to save for another year, cut back on spending or look for a less expensive house. "Before the child even asks for money, suggest that they go over their budget. If they are looking at a Mercedes when all they can afford is a used Toyota, they are setting themselves up for failure right from the start."
What are the terms? If you proceed, decide if it's a gift or loan. If a loan, what's the time frame for repayment and the interest? Also important: How will the monthly payments be made? Check? Direct deposit? "You also need to add in any contingencies. Suppose they lose their job or get sick or have an unexpected child? If you set up the payment method and contingencies plan ahead of time, it makes for less anxiety." Of course, the agreement should be in writing, usually drawn up by a lawyer or other professional.
Remember the siblings. Lending money to one child can trigger negative reactions among the other children. "Even with different financial circumstances among siblings, everyone feels entitled to an equal share. Have a conversation with other siblings, explaining the circumstances and what they might expect."
Plan ahead. "In my experience, usually the young couple is about $10,000 or $15,000 short. I suggest parents save for this in a separate account before they even ask, so it doesn't impact their retirement accounts."
Mary W. Quigley, a journalist and author, has written two books about motherhood and work. A New York University journalism professor, she is the mother of three adult children and blogs at http://mothering21.com