How To Help Adult Children Buy A Home In 2023
Many recent studies have concluded that today’s young adults face a tougher economic environment than their parents did. Debt, unemployment and property prices make it harder for this generation to buy a home in 2023.
If you’re in a position to help a close friend or relative, this post will show you several ways you can boost his or her home-buying power.
Improve Your Child’s Credit Score
Mortgage applicants with higher FICO scores pay lower mortgage rates. With better credit, they may qualify for higher mortgage amounts and / or make lower down payments.
It’s a challenge for young adults to attain an excellent credit score. This is because it takes time to develop a credit history, and this history is the most influential factor in the FICO credit score calculation.
If your own payment history is good, you can help your child by adding him or her to one or more of your existing accounts. This is called adding an “authorized user.”
Credit bureaus then link your good payment history to your child’s credit report. This can improve a score quickly.
Add To Your Child’s Reserves
Another factor that affects younger homebuyers trying to buy a home in 2023 is “reserves.”
The term refers to the amount that the borrower will have in savings after closing on the property. In other words, how much money will be available to pay the mortgage if income is interrupted?
“Reserves” are calculated in months. Suppose your total housing payment with taxes and insurance is $2,000 a month. Assuming that you’d have $10,000 in savings after closing on the house, you’d have five months of reserves. ($10,000 divided by $2,000 equals five months.)
Applicants with more reserves appeal to underwriters. Add your adult child to a savings account or two, if you’re comfortable doing so. Reserves can push a borderline application from “deny” into “approve.”
Add your adult child jointly to your savings a few months before he or she applies for a mortgage. Mortgage lenders often want to see two or three months of bank statements to verify an applicant’s assets.
You’ll probably also have to write a letter stating that your child has access to and ownership of the funds.
Help With A Down Payment
Many mortgage programs, including government-backed loans like FHA, do not require homebuyers to make their down payments out-of-pocket. Fannie Mae and Freddie Mac also offer loans with no minimum borrower contribution.
They allow you to gift your child’s down payment.
To make a gift work, you must first prove that you have the money to give. For example, you’d provide a statement from your account, showing the money is there.
Next, you must either pay the money directly into the escrow account or into your child’s account. Keep copies of all canceled checks, wire transfers or other documents.
Finally, you’ll need to draft and sign a “gift letter.” The letter must state that the money you provide is indeed a gift and that repayment is not required.
Be A Co-Borrower, Not A Co-Signor
It’s better to be a co-borrower than a co-signor.
As a co-borrower, you are obligated by the mortgage. However, you also get ownership interest in the house.
Co-signors, on the other hand, own none of the property. What they do get is what’s called contingent liability. They can be forced to repay the loan if the borrower defaults.
Co-borrowers with good credit, stable income and / or substantial assets can strengthen a new homebuyer’s chance at loan approval.
Before giving your child money for a home purchase, verify the tax consequences of doing so. Gift taxes and other penalties could apply if the amount gifted is large enough.
Adding your child to an account as an authorized user is an act of trust. You are giving them the right to use the available credit, without any repayment obligation.
Ditto with adding your child to bank accounts. Joint ownership means that either party can withdraw all of the funds in an account.
If you choose to co-purchase with your child, agree in writing beforehand who pays for what and who owns what.
What Are Today’s Mortgage Rates?
Current mortgage rates affect how much your child can spend on housing. Help your child boost his or her income, credit score, assets or down payment, and that usually results in better mortgage offers.