real estate

How to help your kids buy a home

mother and daughter smiling in front of house
Highlights
  • Three factors determine whether it's smart to help offspring buy a home.
  • No-no's include taking the money out of the parents' retirement accounts.
  • If a loan or lease is involved, make sure to have a written contract.

Traditionally (and when they could afford to), parents have provided cash to their offspring for down payments on homes. But in these days of tightened credit guidelines, some parents take bigger steps to help their kids become homeowners at today's low interest rates.

Three factors determine whether it's financially smart for parents to help adult children buy homes: the parents' finances, the kids' finances and the real estate deal itself.

"The first rule of thumb is that parents should never get financially involved with their adult offspring unless they are adequately prepared to address their own needs and pending retirement, which may not be far down the road," says Guy Penn, principal and founder of G.M. Penn Wealth Management in O'Fallon, Mo.

Penn says while there's no one-size-fits-all answer to whether parents should help their offspring buy a home, it definitely is a bad idea to pull money from a retirement account to give assistance.

Jeffrey Ivory, a partner with Stonebridge Financial Partners in Bingham Farms, Mich., says, "If parents are giving their kids down payment money, they should be willing to lose that money and not get it back. If they are helping their kids by buying a home and renting it to them or by co-signing their loan, they need to have not only the liquidity for the down payment, but they also need to be certain they can pick up the mortgage payments if the kids cannot pay them."

Adult offspring finances

Parents should make sure they are helping their kids for the right reasons, Ivory says.

"If the kids can't get a loan on their own, the parents really need to know why not," says Ivory. "If the scenario is that your kids are going through a divorce or a job loss and you want to help them, tying them to a permanent location may not help. If they are dealing with the financial consequences of credit problems, helping them pay off their credit card debt may be more important than buying a home. But if you are helping a young couple with stable jobs who just haven't had time to save for a down payment, and you can easily afford to help, this could make sense."

Ivory says parents should ask their kids to pull their credit scores and show it to them, and ask to see their paychecks and credit card debt.

"If your kids are already struggling, then you are setting them up to struggle more if you get them into a house they can't afford," Ivory says.

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