How Parents Can Help Their Grown Children Finance and Buy Their Own Home

When the time comes to purchase a first home, questions about financing and down payments are sure to arise. Buyer’s often find themselves asking how much money they need to save up to buy a home as well as how will they afford the monthly payments? Parents (or other family members) often want to help out in some way but aren’t always sure how they can help their grown children get into a home.

The most important questions to start with are are:

• Can the buyer (grown child) afford a home’s monthly payments?
• Can the buyer (grown child) afford the down payment required for purchasing a home?

While these questions sound similar, they are very different and directly inform how much a buyer will need to save upfront and how much they can afford monthly. If the buyer speaks with a local loan officer and determines that haven’t been able to save up the funds they need for closing yet and down payment assistance won’t work for them or maybe they can’t qualify on paper for the payments on the home that meets their needs they may be asking, what do I do now? Never fear, there are some options still to consider. There are some different ways that parents or other family members may be able to help the buyer out instead of that person having to wait another year to purchase the home.

One of the biggest challenges for buyers , especially first-time homebuyer, is saving the funds to purchase the home. The amount a buyer brings into closing is comprised of the down payment, tax, title, and other closing fees. This upfront money will amount to thousands, and sometimes, tens of thousands, of dollars and cannot be financed. These are funds a buyer must have in hand -well in a cashiers check or wire – at the closing.

Building up savings for the funds required at closing is the most common way to pull funds together. However, it can also come from family members through gift funds. In recent years the use of gift funds has become an increasingly common scenario. This is due in part to the increasing price of starter homes and the increasing amount of student debt that first-time buyers are carrying. There are many strategies to pulling together funds for closing, most times for first-time homebuyers combine a number of options to accumulate the amount needed.

How common is it to get gift funds? In 2023, among homebuyers under the age of 30, 40% used a gift  or inheritance from family for down payment.

So how does it work? There are a number of methods, options and advice you should consider. Let’s explore the most common.

Using a Gift to Make a Down Payment on a First Home

The cleanest and easiest way for a family member or friend to help with a down payment is by giving a gift. That said, there are still rules, limits and best practices for using a gift for a down payment. There can also be different requirements for using a gift depending on the loan program that will be used. Because of the variables, the buyer will want to work with a personal loan officer to ensure they are going about things the right way.

In most cases, if the buyer is receiving a gift to make or help with the down payment or closing costs, lenders will be required to document and source the gift. Typically a gift letter (template provided by lender in most cases) will be given to the buyer to fill out, it will ask for the amount of the gift, the name, address and phone number for the buyer and the gift donor and includes verbiage that clarifies this is a gift and is not expected to be paid back. In most cases, bank statements are also needed from the donor and the buyer to show the funds leaving one account and arriving in the other.

Who can give a gift? In most cases gifts for the purpose of purchasing a home are limited to family members or close friends. Tax implications may also apply, so it is advisable to speak with a tax professional prior to transferring funds. As of 2024, a person can gift up to $18,000 per person without filing a gift-tax return IRS Form 709.

A less common gifting method is a gift of equity, which would come into play if a buyer is purchasing a home that is currently owned by a family member and that current owner is “gifting” them equity in the home. This is a unique scenario and a bit or orchestration and understanding is needed between parties to make sure everyone knows what is needed and how it impacts them. To find out more about this, contact your local loan officer to discuss.

Parents as Non-Occupant Co-Borrowers

Most people have heard the term co-borrower, meaning someone who is signing the mortgage with you and will live with you in the home but you may not have heard the term non-occupant co-borrower. A non-occupant co-borrower is someone who is signing on the mortgage with you but does not intend to live in the home. This distinction does impact some the loan programs and terms that are available to purchase a home.

Why would a buyer want to consider using a non-occupant co-borrower arrangement? In most cases this is brought into the conversation when the buyer doesn’t qualify to purchase the home on their own so they are looking for someone to help them qualify. If they have someone, such as a parent, who wants to help you qualify they should be aware that they will be required to provide the same type of information as the main borrower (credit, asset and income data) and they will be equally liable for the loan. As people age and get into later stages of life they may have more disposable income, meaning they make a fair amount more than they spend, so they may be in a better, more established position to qualify for the home.

Entering into a co-borrowing arrangement, whether occupant or non-occupant, it will impact the credit and financial situation for all parties, so it’s wise to consult with a personal loan officer and perhaps a financial planner or tax professional before entering into the agreement.

How to Work With Family and Friends When Getting Help as a First-Time Homebuyer

Mixing family, friends, and money can create a volatile situation. Many times the root of the conflict is confusion, misunderstanding or a lack of documentation. No matter how the friends or family decides to help, it’s useful to follow some simple suggestions.

• Document Everything: All gift transfers should be treated as a business transaction. Make sure to get a document signed by both the giver and recipient stating the amount of the money involved and any declarations regarding payment terms or its status as a gift.
• Prepare All Parties: Ensure that all parties involved in the transaction understand what will be asked of them. IE if someone is a co-borrower on the loan the lender will need to review all of their personal financial information as well.
• Use Third-Party Experts: Work with a personal loan officer, lawyers, financial advisors, tax advisors and other organizations to ensure you understand the scenario and are complying with any and all laws/regulations.

Turn to Family and Professionals for a First Home

Purchasing a home was never easy, but with increasing home prices and student debt, buying a first home today is extra challenging. That’s why a growing number of first-time homebuyers are turning to parents and family members for help.

If a buyer has parents or friends that is willing to assist, they should take advantage of it. Owning a home remains one of the best investments a person can make; the sooner a person can purchase a home, the sooner they can start building equity. Whether it’s a gift for the down payment, co-borrowing or something else, start by talking with a personal loan officer. Their advice and expertise will help buyers and parents avoid mistakes, follow regulations and get the best loan program for the situation.

Want to get started now? Complete our Quick Start Form and we’ll connect you with a loan officer that matches your specific needs. They’ll provide a free consultation and guide you through every step of the loan application process.