Helping Your Adult Child Buy Their First Home

Background: In our current environment of low interest rates, many parents want to help their adult children get into their first home.  The problem is most young adults lack the down payment necessary.  Let’s discuss how we can help our child buy their first home as well as some pitfalls to avoid.

1. Down Payment Assistance

• If you feel secure with your emergency fund and you have built up a substantial savings account, one option is to lend them the funds from your savings. Make sure you have a discussion with your family before you loan money so there are clear expectations for both sides. I recommend writing your terms of the loan down so everyone understands their obligation.
• Another option is to lend them funds from your investment accounts. It is important to keep in mind you may be subject to tax consequences if you withdraw funds from a taxable account which are not returned in a certain time period. This can be a delicate situation if your adult children cannot reliably return the loan. My advice is to act with caution and always consult your trusted tax professional before making major decisions.
• You may also consider borrowing the funds from your 401(k). This is a good option IF you pay yourself back. The downside of this strategy is the money you borrow will not be working for you in the stock market while they are missing from the account. Also, remember the loaned money will need to be paid back if you leave your current position. In this case, it would be a taxable distribution and you may suffer a penalty if you are under 59 1/2.
• Lastly, you could gift them the down payment without expecting the funds returned. Every family functions in a unique way, so consider a strategy which works best for your situation.

2. Refer them to a qualified mortgage lender

• Right now, there are numerous programs designed for the first time home buyer that offer very low down payments and interest rates. One common program in our area is an FHA loan. To learn more about all the programs your loved ones may qualify for, consult your mortgage loan professional. He or she may have amazing financing options for young adults.

3. Make sure if you loan them money it is a true business transaction

• As I mentioned in my first point listed, I recommend making the terms of your loan explicit and clear as soon as you have decided to help with their down payment. Have your children sign a promissory note with a defined interest rate, terms, etc. This can help you avoid a number of potentially conflicting situations down the road.
• If you feel “at risk” lending them the money, make the loan a second trust deed. To make any changes to your trust, consult your estate planning attorney. Contact your trusted financial advisor for an estate planning attorney reference if you do not already have a trust established.

4. Co-Signing

• If they have trouble obtaining a mortgage on their own, you may consider co-signing but PLEASE be careful as you may get stuck with a house you don’t want or damage to YOUR credit if they miss their payments.

Even though interest rates are low, real estate and especially a primary residence should be part of a long term financial plan. Consider the methods we covered today to help your child obtain the American Dream…home ownership.

Jon Sanchez is a registered representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC.  OSJ Branch: 12671 High Bluff Drive Suite 200 San Diego, CA 92130.  Sanchez Wealth Management, LLC and IFG are not affiliated entities.  CA Insurance Lic. #0772626.