Whether you’re buying the home as an investment for yourself, or helping your child buy a home in their name, a new home could help your adult child transition to the real world.
With interest rates near historic lows, purchasing a home has never been more affordable. Here’s what you need to know if you’re looking for ways to help get your child a home of their own.
Purchasing a Home for Your Kid to Live In
Purchasing a home for your child to live in is a great way to get them through college rent-free, help them get on their feet or get them out from under your roof faster.
You should apply for a mortgage and purchase the property in your name without including your child in the transaction. The home will be considered an investment property because you will not be occupying the home.
Loans on investment properties tend to have higher interest rates and require a higher credit score; however, the process of obtaining a mortgage is the same as if you were purchasing a primary residence.
Once you own the investment property, you can allow your child to live rent free without a lease if you choose. While this can be expensive for you, you may be eligible for tax deductions, and you can charge them rent or sell the property once they no longer need your financial assistance.
Gifting a Down Payment
If you want to help your child buy a home that they will own, gifting part or all of a down payment, closing costs or prepaid interest is another great option. There are several different types of mortgages that your child can get with your financial gift, including an FHA, VA, conventional or jumbo loan.
Your child will need a gift letter that proves the amount you’ve given them and states that they don’t have to pay the money back. They’ll also have to provide evidence the funds were transferred in the form of a withdrawal or deposit slip, or a copy of the check and evidence that it has been deposited into your child’s account.
Cosigning a Mortgage
Cosigning a mortgage with your child may be a lower-cost way to help them out. Poor or non-established credit and lower income may hurt your child’s chances of qualifying for a mortgage on their own. Additionally, most lenders require at least two years of consistent employment, so if your child is just beginning their career or recently had a career change, they may not qualify on their own.
It’s important to understand what you’re getting into if you decide to cosign. This additional loan will appear on your credit score and may influence future financial decisions. Most notably, if your child hits financial hardship, you will be liable for their mortgage payments, so you should make sure you can pay their mortgage in addition to your own in a worst-case scenario.
Can I Afford This?
It’s important for you to take an honest look at your finances to determine if these options are viable. While helping your children is great, you need to make sure your own bills are paid first.
Set up expectations with your child, too. If you purchase an investment property, determine if they live rent-free or if they will need to pay you. Once you’ve done this, you can begin the exciting process of applying for a mortgage and getting your kids out on their own!
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