How to Help Your Adult Child Buy a Home

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• Gift funds for down payment
• Co-sign for your adult child’s mortgage
• Become your child’s landlord
• Alternative financing solutions
• Other strategies to help your adult child

Gift funds for down payment

Saving a down payment is one of the biggest obstacles to homeownership.

Even though 20% down isn’t typically required, saving 3% or 5% remains a challenge for some adults given current home prices.

With inflation driving up the cost of everything else, it can take buyers longer than expected to save the necessary funds. This is especially true considering they’re also responsible for closing costs, which can be an additional 2% to 5% of the purchase price.

The good news is that home buyers don’t have to come up with the cash on their own.

Several mortgage programs allow parents or other relatives to gift money for their down payment. However, there are guidelines and limitations.

For example, all funds must be a gift, not a loan, meaning repayment is not expected. The donor must provide a gift letter stating this and provide the lender with information so they can determine the source of funds.

Different mortgage programs have specific rules regarding gift funds too. FHA loans allow the entire down payment to be gifted, while conventional loans have stricter requirements depending on the loan-to-value ratio. You must contribute a minimum of 5% of your own funds if the down payment is less than 20% of the purchase price.

Co-sign for your adult child’s mortgage

Some parents have also considered co-signing their adult child’s mortgage loan.

While this might seem like a viable way to help them achieve homeownership, it’s important to understand that co-signing comes with significant responsibilities.

To qualify as a co-signer, you must be added to the mortgage loan, meaning the lender will consider your credit history and financials. Therefore, you’re not a silent partner. If your adult child defaults on the mortgage, you become responsible for the payments.

The co-signed loan will also appear on your credit report. So while the primary borrower’s good payment history can help your score, their bad payment history can also hurt it.

Additionally, since this is technically your loan too, co-signing can increase your debt-to-income ratio and make it harder for you to secure your own financing in the future.

Keep in mind, also, that to remove your name from the loan, your child will need to refinance the mortgage and obtain a new loan in their name only.

Become your child’s landlord

Another option is to become your child’s landlord. In this case, you purchase a home in your name and allow your child to rent the property.

While your child won’t own the home, this arrangement could help them secure housing, especially if rental prices in your area are high. It allows them to have a stable place to live without worrying about annual rent increases or the possibility of a landlord selling the house unexpectedly.

However, it’s crucial to establish clear terms and boundaries for the rental agreement.

To avoid potential problems, both parties must agree on the rental terms, including rent amount, payment due dates, and any responsibilities for maintenance. Put everything in writing to prevent misunderstandings.

Additionally, treat the arrangement as you would with any other tenant, maintaining professionalism to avoid straining the parent-child relationship.

Likewise, it’s important to review your financial situation to make sure you can manage the mortgage if your child encounters any hardship.

Alternative financing solutions

You might also consider alternative financing solutions like family mortgages.

This involves a family member providing a loan to help with the home purchase.

In this case, the relative acts as the lender and sets the terms for repayment. This can help your child buy a home without going through a traditional bank. This might work if they can’t qualify due to no credit history or a limited work history.

Again, it’s important to have a clear, written agreement outlining the loan amount, repayment terms, and any interest rates.

Other strategies to help your adult child

But these aren’t the only ways to support your adult child in their path to homeownership.

If your child has money for a down payment, but little left for other expenses, you might offer to help with closing costs. This is another significant hurdle for many buyers.

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These costs can add up quickly and often catch first-time buyers off guard. By covering these expenses, you might make it easier for them to afford a home.

If providing gift funds or helping with closing isn’t feasible, you might consider contributing to necessary repairs, such as fixing a roof, updating electrical systems, or painting the house. This can enhance the home’s value, making it a more attractive purchase.

Some people have even tapped their own equity to support a child’s home purchase. This involves accessing funds through either a refinance, a home equity loan, or a home equity line of credit (HELOC).

Additionally, leveraging your personal network can be incredibly beneficial. If possible, connect your child with reputable real estate agents, mortgage brokers, or financial advisors who can provide guidance and help them through the buying process.

If your child isn’t quite ready to purchase a home, you can still be supportive by helping them improve their financial standing.

For example, offer guidance on managing their finances, paying off debts, and raising their credit score to better prepare for homeownership. These steps can help them qualify for a mortgage, and secure better terms and interest rates.

Bottom Line

Supporting your adult child to help them buy a home can take many forms, from assisting with the down payment to connecting them with professionals. If you’re willing to help, carefully evaluate your situation and decide what type of support you can realistically provide — without compromising your own financial stability.