Rising prices and a dearth of homes for sale in many markets have made it harder for many looking to buy their first home.
One of the biggest obstacles many face is saving up for a deposit, particularly in hotter markets where competition is fierce and can quickly drive up prices and put pressure on buyers to bring more cash up front.
That trend is prompting many parents to step in, some opening their wallets, others welcoming their adult children to live with them again temporarily while they save money or pay down debt.
Whether it’s a cash gift or another form of aid, it pays for parents to consider how to best help their children without placing their own financial well-being at risk.
Here are some factors parents should weigh when helping their children buy a home:
ASSESS YOUR FINANCES
Parents may be tempted to pitch in financially to help get their children into their first home, but they shouldn’t do so before going over their own finances and ensuring they can they can afford to live without the funds.
This is particularly important if the parents are close to retirement, when they will have to live on their assets, savings and investments.
“Do not, in any case, put your retirement security at risk just to get your child into a home,” said Elizabeth Grahsl, a private banker at Prosperity Bank in Dallas.
“He or she will have plenty of chances to own real estate, but you probably don’t have time to catch up if your retirement is derailed.”
An accountant or financial adviser can help figure out whether you can afford to make a sizeable contribution to your children’s homeownership fund.
Another option is to use an online retirement calculator to estimate the impact that any big withdrawals would have on your retirement savings.
GO WITH CASH
If you decide to kick in some money toward your child’s deposit or other costs, it’s best to go with discretionary cash, say from a savings account.
That’s because it’s likely not earning much in the way of interest, so you’re not losing much in potential gains on the money.
Avoid withdrawing funds from individual retirement accounts.
MAKE IT A GIFT
Some parents may decide they can’t afford to give their children a large sum of money, instead preferring to do it as a loan.
But that can have an impact on the borrower’s ability to qualify for a mortgage.
Mortgage lenders generally allow borrowers to use funds received as a gift from a relative to cover their deposit, closing costs or to add to their savings.
But if the money is being borrowed, the homebuyer is required to disclose that loan to the bank, which could alter their evaluation of the borrower’s debt-to-income ratio.
That’s a calculus banks use to help determine the borrower’s ability to pay back a mortgage.
If the funds are given as a gift, they don’t count as a debt that has to be repaid. “When you apply for a loan they want to know how much money you have,” said Erika Safran, a certified financial planner with Safran Wealth Advisors in New York.
“If you’re receiving gift, that person is going to have to write a letter saying that they don’t expect it back.”
Parents can help give their children a financial leg-up on their home purchase, but there are other ways to do so beyond just giving them cash. Explore all alternatives.