1. Co-Sign the Mortgage
When a parent decides to help their children by co-signing the mortgage, the primary benefit is to allow their children to qualify and get better interest rates for mortgages. In most cases, the parents are simply going on the title and the mortgage purely for the ability to allow financing to be approved. No funds have to be contributed nor do the parents require an ownership interest. At the earliest possible opportunity, the parents will then “come off” the title and mortgage when their child refinances at the end of the term. How does co-signing help? When parents are co-signors, banks tend to have more success getting approval from their credit departments as they may have something that their child lacks, like higher income or better credit. Things co-signers should be aware of- Co-signing will affect your credit score. Since credit scores will be pulled for both the parents and the child, then the loan repayment history will affect both parties.
- Loan Responsibility falls to the co-signer if…the adult child is unable to fulfill the loan repayment obligation
- The co-signer is on the mortgage & title but has no ownership rights.
- For young buyers using their parents as co-signers, it may make sense for the parents to go on the title as 1% owners instead of 50/50. That way, the buyer may get access to first-time homebuyer rebates and this will also reduce the taxes a parent might be on the hook for when it comes to capital gains upon the property being sold.
2. Be a Guarantor
A guarantor assists a primary borrower that usually has the income to support a mortgage but might have credit issues that are preventing them from securing a loan by themselves. A guarantor will have their name on the mortgage, but not on the title of the property. This means that they don’t have the same property rights as a co-signer would. The role of a guarantor is strictly to guarantee that the mortgage payments will be made in order to get a mortgage approval. What parents should be aware of, is that, unlike a co-signer, if mortgage payments are not made by your child, then the guarantor becomes liable for the default.3. Down Payment Assistance
More and more cash-strapped adult children are receiving financial help from their parents in the form of “gifted” down payments. If you’re a parent thinking about contributing funds for your child’s down payment, then consider the following:- Is it a Gift or loan? If it’s a gift, then there are no strings attached. If it’s a loan, then make sure to outline the payment terms. Whatever the case, it’s worth making the distinction between gift or loan clear and write it down so everyone is aware.
- Lenders will require a gift letter as proof confirming that the funds being contributed do not need to be repaid.
- If your child is married, outline what will happen in advance to any of the home equity if they are to get divorced and need to sell.
- Gifts of cash have to be your own after-tax dollars so there are no tax implications to you.
Three Ways Parents Can Help With the Down Payment:
1) Gift the entire down payment – By doing this, it leaves the adult child to cover the rest of the monthly costs (ie. mortgage, property taxes, home insurance, utilities & maintenance). 2) Contribute just enough to help your child avoid mortgage insurance – Helping your adult child avoid costly mortgage insurance is the main benefit here. If your child is able to save up 15%, then parents can contribute the additional 5% to get to a 20% down payment and avoid mortgage insurance. 3) Match the down payment – Often, saving 10% for a down payment can take a considerable amount of time. Having your parents match the down payment can mean the difference of getting into the market now or waiting an additional 2 years to save more funds, but also facing possible higher starting prices.3. Co-Buy with Your Children
Co-buying allows parents to contribute funds to the purchase of a property for their adult children, but also share in the equity gains should property values rise and the home is sold. In this scenario, other than helping your child purchase a home you are also looking at the purchase as an investment. Both parents and children contribute an amount for the downpayment and also share in the monthly costs. If the child decides to live in the unit, they also have the added responsibility to maintain the property. When the time comes to sell the property, both the parents and child share in the increased value of the property (or decrease). Before moving forward with this option, it is best to come up with an agreement between both parents and children to determine who pays for what.4. Loan your Kids the Money
Pay the entire amount of the home in cash. Believe it or not, this does happen. The benefit of this scenario is that the child doesn’t need to qualify for a mortgage, so potential issues when obtaining a mortgage like coming up with a down payment or credit issues do not come into play. If this is a scenario that is possible then parents can determine how this money is paid back any way they choose, or not at all. This is often called a “Living Inheritance” and only makes sense if parents are in a financial position where this is possible.5. Pay Closing Costs
Land transfer taxes, legal fees, and moving expenses can’t be added to the mortgage so having parents cover that cost for their children can be a relief and can make all the difference in the world. Again, with this scenario, it might be best to draw up a re-payment structure if required.If you have any questions about how you can help your child purchase a home call, text, or email me anytime!
