Personal Finance 

How to Help Your Child Buy a Home

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If you believe the financial news media, getting a mortgage is a lot easier than it was just one year ago and not only that, it’s cheap. With rates aroundso low, it’s the best buyers’ market this country has seen in decades. Like most reports we read or view in advertisements, it’s not quite that simple.

It’s still more difficult to get a mortgage than it was before the housing collapse and most people would agree that it should have never been that easy to begin with but still, somebody with good credit and a steady job should be able to buy a home at close to the low interest rates. Sometimes that’s the case but often, it’s not.

Where the government couldn’t help, consumers are finding a way to make getting a home a little easier. Parents are becoming lenders to their children and that is making the purchase of a home a reality for many who couldn’t find success on their own.

The Gift Limit

According to this article, one out of every three first time home buyers had help from their parents. There are two IRS friendly ways to do this. First, the IRS allows a married couple to gift as much as $26,000 to their children without triggering the gift tax. If you’re single, your limit is $13,000 but you can actually give a higher amount as long as it doesn’t go over the lifetime maximum which, as of 2012, is more than $5 million. That may drop to $1 million in 2013 unless Congress acts to change that but staying within the yearly guideline is a safe way to gift money.

Banks are often willing to lend to first time home buyers with good credit but the down payment requirements are much higher than in the past. The money received in the form of a gift are often used to satisfy the down payment requirement.

A Loan

If you’re not the type to give money away or want to avoid the IRS’ designation of a gift, you can make a loan to your children. Providing you draw up a promissory note, any interest paid by your children is deductible on their taxes and the terms can be very favorable. The IRS has a minimum interest rate you have to charge but on a loan of three or less years, that can be as low as 0.19%. On a longer term loan, the minimum rate is 2.63% as of this writing. You can find the current rates here.

Not only are the interest rates low, but you can set the terms in whatever way you please. Your child could make interest only payments for so many years and then start paying on the principal or you could make a graduated payment schedule. You could also forgive part of the loan’s principal amount by applying it to the maximum gift amount.

If your child is having trouble meeting bank requirements for a home, there are ways to help that don’t trigger IRS penalties. For longer term home buyers, there’s no doubt that 2012 will continue to see homes at garage sale prices.

{ 5 comments, please add your thoughts now! }

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5 Responses to “How to Help Your Child Buy a Home”

  1. Martha says:

    In a lot of pricier markets (NYC, DC, San Fran) many of my friends either had to live with their parents until they had saved enough for a down payment, and/or their parents contributed to a down payment in order for them to be able to afford a home. Now that there are more houses available for lower rates I wonder if we’ll start to see the number of intra-family loans increase since there are many good deals to be purchased.

    Anyone else observe more houses being sold/purchased recently?

  2. cvargo says:

    @Martha I am under contract and I will tell ya if it is a regular sale atleast here in Utah your house will probably only be on the market for 24 hours.

    I for one am in the process of buying my first house I am 23 years old and close in May. I saved my money and have enough for 20% down payment and I am not borrowing money from my parents. My parents instead gave me the best gift… the value of money and an education

  3. Long says:

    I live in Southern California and I am seeing many houses being sold via short sales or foreclosures. Purchases of existing homes move quick because investors are paying cash for the home.

    Those looking for mortgages don’t stand a chance because banks aren’t willing to wait 30-60 days to receive their money.

    @cvargo That’s pretty awesome that you’re buying a house at 23. However, in expensive areas like SoCal or the areas Martha mentioned, that’s pretty tough to do at such a young age. I lived with my parents (as Martha mentioned) and saved heavily, but was only able to manage 10% down at age 28.

    • cvargo says:

      @Long Yea I understand that I am in the minority for most of the United State. 210K Wouldn’t get me a 3000 sq. ft. house in many states.

  4. Scott says:

    “the down payment requirements are much higher than in the past”? Just the RECENT past. Go back just one (idiotic) decade and it’s pretty much the exact same.

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