Helping Adult Children Financially: Part 3 - Housing

Owning one’s own home is the quintessential American dream. Yet, achieving this milestone has been elusive for many of those in post-Baby Boom generations. As noted in Helping Adult Children Financially: Part 2 - Education Expenses, personal income has not kept pace with housing costs since 1965. As a result, Gen X, Millennials, and Gen Z all lag the Boomers in home ownership by age 30.

It’s no wonder many Boomer parents are motivated to help their adult children reach the goal of homeownership. There are many ways to render such assistance, so it makes sense to research the alternatives to choose the best method for each family’s unique financial and philosophical perspective. The following are ideas for helping adult children financially afford home ownership.

Hanging Out With Mom and Dad

Often, the most significant barrier for young adults in buying a home is being able to afford a down payment for a new home. However, building up savings can be a daunting process. As will be covered in a later section of this eBook, some parents directly help with down payment funds. For other adult children, they may be having a tough time keeping up with all their bills, including rent. In either case, parents may offer low-cost or rent-free living at home.

While living with parents to save money can be a practical approach, embarking on such an arrangement should be carefully considered. Adult children who have already tasted independence may feel uncomfortable falling back into past parent-child dynamics. At the same time, parents may feel resentful at the loss of their recently attained empty nest freedoms.

Therefore, parents and adult children must discuss ahead of time how the co-living arrangement will be conducted and how long it will last. 

For example, what spaces in the house will the new “roommate” occupy? Where will cars be parked? How will food, utilities, and other household costs be shared? What are the “quiet hours” in the house? These and other questions must be ironed out at the outset to ensure peaceful living for all.

As for the duration of the stay, the specific goals should be agreed upon. It’s not enough to say, “I’ll leave when I’ve saved up enough for a down payment or when my bills are paid off.” The goal needs to be more specific.  For example, the price range for a new home should be established, thereby allowing the calculation of a down payment target. For those with big bills, agreement should be reached on which debts will be retired.  With a concrete goal, both parties have a clear expectation of the move-out date.

Helping with the Down Payment

Some parents have the resources to provide funds fully or partially for a down payment. Bankrate reports that 28% of down payments are gifts from family or friends.

However, this can be significant depending on the house price and the required down payment percentage, which can vary anywhere from zero to 20% or more with an average of 13%.

Using the median U.S. home price of $414,100 (Q2/2023), a 13% down payment is a whopping $53,833.

Giving money at such amounts raises the issue of gift tax reporting. As noted in Helping Adult Children Financially: Part 1 - The Basics, an individual can give up to $17,000 per person during 2023 ($34,000 per couple) without IRS gift tax reporting. However, the effect of giving can be magnified by giving $17,000 on December 31 and then again on January 1 when the new year arrives. This effectively doubles the contribution toward a down payment.

If down payment money is gifted, a mortgage lender typically requires a “gift letter.” This document provides information about where the money came from and states that it is not a loan to be repaid. Loaned money would mean the borrower has further financial obligations that could hamper the ability to make mortgage payments.

Experts recommend a down payment gift be deposited in the adult child’s bank account at least 60 days before closing on sale to ensure the money appears as part of the borrower’s assets in time for the sale.

Cosigning a Mortgage

Many young adults have trouble qualifying for a mortgage loan because they have not had enough time to build a solid credit rating. Parents with a better credit history can help by cosigning on the loan. This could help the adult child qualify for a larger loan and a better rate. On the other hand, if the primary borrower (the adult child) fails to make payments, the consigner (the parent) is responsible for doing so.

Because of this responsibility, parents must carefully assess the potential impact on their finances. It’s essential to clearly understand the adult child’s ability to pay and what risks there might be to that ability. This may require the primary borrower to share detailed financial information with the cosigner on an ongoing basis, such as allowing access to online mortgage statements and being alerted to any late payments by the lender.

Therefore, cosigners and borrowers need to be candid with each other about their arrangements. Borrowers need to be honest about potential missed payments. For their part, cosigners must be vigilant and ask for official loan information to verify payment status. As a further risk hedge, consigners would do well to stash away the equivalent of two months of payments if the loan needs to be temporarily maintained until the borrower gets back on track.

Parents Buying Property

Sometimes, the only way to start the adult child on the road to home ownership is for parents to purchase a property, meaning the parents’ names are on the title. Unless it’s an arrangement where the adult child will be a renter indefinitely, the goal would be to set up a long-term plan for the young adult to assume ownership eventually. This can take different forms.

Second Home – Parents can buy a property as a second home for their adult child’s living quarters. An arrangement can then be made for the young adult to make payments over time to acquire the property. This can potentially get the young person into a home earlier in life with more affordable terms for achieving ownership. The downside is that second-home mortgages often command higher rates and more significant down payments.

Co-Ownership – In this scenario, parent and child’s names are both on the title. The parent pays all or part of the down payment, and the adult child pays all or part of the mortgage. When the house is eventually sold, both parties split the proceeds. These can be complex arrangements, so it is best to consult a real estate attorney to draw up the paperwork.

Private Loan

In cases where an adult child can’t qualify for a traditional loan, a parent with enough means could act as the lender for a home purchase. However, the IRS stipulates a minimum interest rate to prevent a gift tax reporting requirement. However, since these rates range from 4.02% to 4.86% in 2023, they beat most mortgage market rates.

Other benefits of private loans are the parent-lender can set more generous grace periods and easier payment schedules. Also, if the deed is correctly recorded with the county, the borrower can deduct the mortgage interest. Parents need to remember, however, that the interest paid is taxable income.

The two parties can create their own loan documentation, but involving a real estate lawyer to prepare the contract makes more sense to avoid tax or legal problems.

Parents Selling Their Home

Empty nest parents who want to downsize and move to a smaller home might consider selling the old homestead to their adult child. The advantage of this scenario is that the buyer and seller automatically have more visibility to both sides of the deal than a transaction between strangers. Nevertheless, the best policy is to treat the sale like any other between two parties. This includes fixing the sale price, obtaining a mortgage, and scheduling an inspection.

Setting the selling price should be done knowing all the implications. Many parents would be inclined to set the price low for their child. However, if the parent still has a mortgage and sells for less than the mortgage balance, it would be a “short sale” and require additional documentation.

It’s also a good idea to retain the services of a real estate lawyer to handle the paperwork as well as a title company. This will help avoid costly mistakes and protect both parties’ interests.

Parents in the Granny Flat

Becoming their renters is another option for helping adult children afford home ownership. This could involve living in the same structure or an accessory dwelling unit (ADU), sometimes called a “granny flat.”

The home purchase could include an ADU in the sale, or it could be added on. While ADUs are becoming more popular, zoning laws in some localities restrict them, so it’s best to know the rules before pursuing this alternative.

Whether an ADU or part of the space within a property, parents paying rent for their living space can help the adult child afford mortgage payments—also, many adult children like that they can keep closer tabs on aging parents.

Helping With Mortgage Payments

If none of the above ideas are affordable or otherwise make sense, parents could help with contributions toward the monthly mortgage payments. Like any gift, the over $17,000 annual gift tax reporting requirement applies.

Thinking About Siblings

Finally, in helping adult children in the housing area, as with any other financial help, it’s prudent to consider equity between siblings. If one child gets help on the monetary front, will others expect an equal amount? Perhaps it’s well accepted in the family that one child merits additional support, such as for a disability. Nevertheless, understanding this family dynamic will help shape decisions about helping adult children financially.