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How to Help Your Child Buy a Home

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 [3], 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 [4]. 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 [5].

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.