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It’s particularly hard for many young people to buy their first home these days without some financial support.
But before stepping in with a gift or loan to help with a down payment, parents need to ask themselves some tough questions.
Among them: What is helping my child going to cost me, not just now but also in the long run?
And is this even the right time for my child to buy a home?
It has always been difficult for many young people to put aside enough cash for a down payment. But it has gotten harder in recent years with growing student debt and a slowly recovering job market with limited stability and career opportunities. (Bing: Current US unemployment rate)
That’s partly why first-time owners make up a relatively small share of buyers. According to the National Association of Realtors, first-time buyers accounted for just 29 percent of existing-home sales in April, lower than the average of 35 percent since 2008.
So, what’s a parent to do? Here’s some advice from financial experts.
Stay off that limb
For many financial experts, the most important advice for parents is this: Don’t part with more than you can afford. That’s not as simple as it sounds. It means not just making sure you can still meet your own current needs, but also that you aren’t going to lose money that you need to help ensure a comfortable retirement.
If you’re lending a child money, the calculation of how much you can afford should include the prospect of never seeing that money again. “The first priority is to make sure that parents have enough so that even if a loan went bad it wouldn’t risk the parents’ financial situation,” says H. Debra Levin, an estate-planning lawyer at Chicago-based law firm Seyfarth Shaw LLP.
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Gift or loan?
With a gift, of course, the parents know they are never getting the money back. But if that works for them, the benefit of a gift to the child goes beyond not having to repay the money. Because a gift doesn’t add to the child’s debt burden, it doesn’t hurt the child’s chances of qualifying for a mortgage — as a loan might, especially for children who are already heavily in debt from student loans.
One caveat on that front, though: Parents who give money to their children for a down payment should do so far in advance of a home purchase. That’s because some banks want assurance that the money isn’t a loan, though standards vary from lender to lender.