Nancy Graham December 11, 2019 Family Stewardship & Philanthropy Should You Help Your Kids Buy a Home? Have you been thinking about helping your adult kids buy a home? Today’s housing and postsecondary education costs can make it a tough go for your offspring. Plus, you’ve been their parent for so long. Taking care of them is a hard habit to break, even once they’re plenty old enough to take care of themselves. Today, let’s cover how to avoid causing more harm than good when thinking about helping your kids buy a home. Tender Hearts and Tough Choices As a mother of three myself, I know how hard it can be to watch your children grow up and move out. Sometimes, they may also mess up when it comes to managing their money. If it’s a minor misjudgment, you’re probably okay with letting them live and learn. But what if they want to buy a house they can’t really afford? Many parents feel a duty, and/or a desire to lend their kids a helping hand. This may be hard to hear, but sometimes, letting your kids make their own challenging financial choices will ultimately be in everyone’s best interest. So, before you crack open your bank account or add your name to a mortgage, I’d like to lay down a couple of ground rules. Not for your kids. For you! Financial Challenges First, can you afford to get involved? Don’t go with just your gut feel. I recommend a dose of formal financial planning. Dive into the details on: Where the money will come from – specifically. Tax ramifications, especially if you’ll need to sell something else to free up the cash. Whether this could this hurt your own spending needs or retirement plans. How signing or co-signing a mortgage might impact your financial independence or credit rating if things don’t go as planned. How having your name on a title might play out in your or your child’s estate plans. In short, don’t short-change your own financial stability in the process of trying to help your adult kids. Emotional Entanglements Beyond the financials, there are many emotional entanglements found in gifts, loans, or co-signatures. Seriously. If I could have a house for every time a financial arrangement among family members has gone wrong, I’d be able to incorporate my own city! To name a few of the traps: Inserting yourself into your kids’ home purchase can put a strain on your marriage – especially if you and your spouse don’t see eye-to-eye on how much you want to help. Helping out your kids can create awkward financial imbalances in their marriage, as they compare notes on whose parents offered what sort of help (and whose did not). If you have more than one child, it’s a breeding ground for sibling rivalry unless you are sure you can do the same for all of them. Resentments can build if your kids never learn how to live within their own means. A lifetime dependence on “The Bank of Mom & Dad” is no fun for anyone. Neither are the conversations or unspoken tensions that arise if anyone on either side ends up feeling unfairly treated. Eyes Wide Open Now that I’ve covered the risks, I do understand it might still make perfect sense for you to help your child buy a home. As long as everyone is financially and emotionally willing and able, options include: Offering a direct loan Signing or co-signing a mortgage Giving them a cash infusion to assist Buying the house for them outright (whether gifting it to them, or keeping it in your name) Whichever way you go, I encourage you to treat the arrangement as a legal transaction between you and your child. Set clear expectations to minimize future misunderstandings. For example: Don’t do a loan on a handshake. Set up a formal agreement. Document what the consequences will be if they miss a payment. Follow through as described. If it’s a gift, you and your child should revisit your estate planning documents. You may want or need to make some adjustments if other siblings are involved. Your child may want to take steps to protect the asset in the event of their death or divorce. You may want to do the same if you decide to keep the house in your name. Before you sign or co-sign any mortgage, be sure you understand the terms. Typically, you’ll be on the hook for the entire amount if your child and/or their spouse don’t come through as promised. Always Your Child, No Longer Your Baby To put all of this into perspective, it might help to remember: Once your children want to buy a home, they aren’t children anymore. They are adults. Do you remember when you started out? You may have eaten your share of meals on the cheap. You probably put up with cramped quarters and do-it-yourself repairs in distant parts of town, with an old car in the driveway. Along the way, you no doubt made some bone-headed budgeting decisions too. All of these challenges and more are otherwise known as important life lessons. As much as we want to protect our kids, a little scrimping, saving, and sacrificing can be good for the youthful soul. It’s also good for a grown-up’s lifetime of financial literacy. So, if your kid would love some financial assistance, but you’re not in a position to provide it, the best gift you may be able to give them is a firm, but loving “no.” I hope I’ve given you some food for thought. Better yet, send your kids my way too. No Dumb Questions is available to anyone, free of charge. See you again soon! Share: Facebook Twitter LinkedIn Email CIRO Advisor Report