Buying a home with help from your parents
With housing prices as high as they are today, it can be a real challenge to purchase your first home. Saving a large enough down-payment to make your mortgage payments and home ownership affordable can be difficult, and many aspiring homeowners need help.
One option to consider is asking your family, perhaps your parents or grandparents.
While it might be a little awkward for some, start a conversation with your parents and see what they say. A home-ownership partnership can be a win-win situation, especially if they’re looking for investment opportunities.
If they offer to assist, carefully explore the options with them. And when you decide on a solution - make sure it works for both of you.
Some of the ways they can help include:
Buy an investment property, and rent it to you
If your parents are considering an investment property, one option is for them to buy a second house and rent it to you. You can even consider renting to own.
Your monthly payments will be income for your parents, and ownership resides with them. Any financing required will be based on their financial situation, and any tax on capital gains earned over time is their responsibility.
As an aspiring homeowner, it’s important to realize that being a renter will not help build your credit rating, and if you don’t rent-to-own, you won't move forward with your goal to become a true homeowner.
Provide a gift of cash
Your parents may have sufficient resources to gift you the cash to cover all, or part, of your new home. This is the simplest solution when it comes to taxes if your parents don’t have to liquidate assets to come up with the money.
While an easy solution, they should make sure that giving you the cash won’t strain their finances. A gift to you obviously shouldn’t have a negative effect on them.
If you’re married, you should also have a conversation with your spouse to ensure both you, and they, are happy accepting a gift of money. A gift of cash can, potentially, put strain on a relationship, depending on an individual's past experience or family relations. Some people feel indebted to those who help them, and open communication is always important to maintain strong family dynamics.
Another option is to consider the gift an interest-free loan that you plan to give back when you’re in a position to do so. For either situation – a straight-out gift or one that’s intended to be paid back – ask your parents to put this in writing to avoid any misunderstandings down the road.
Act as your guarantor
Consider having your parents co-sign the mortgage with you. They can often do this if they meet certain income and other requirements. A co-signor, or guarantor, is typically required when the mortgage applicant doesn’t qualify for the loan on their own.
Because of this, and before deciding on this route, carefully examine your finances to determine if home ownership is right for you. A situation where you default on payments could create financial difficulties for both you and your parents.
When they co-sign, your parents essentially own the property with you and share the responsibility for payments equally. If you can’t make your payments, they will be on the hook.
Offer a loan
Finally, if your parents offer to help, consider borrowing money from them at a low rate of interest. This can be a win-win situation. You get a loan and pay less interest than you would if you borrowed from your financial institution. Your parents earn a return that could be more than a savings account or term deposit. Payment terms can also be more flexible and arranged to suit your particular situation.
If you decide on a loan, you should, again, put it in writing. Make it formal, sign an agreement and consider having it notarized. A formal document will avoid any confusion or misunderstanding about repayment terms.
Seek expert advice
Each of these options has its own pros and cons, and the best solution for you depends on your particular situation. Advice from an expert can help.
Get everyone together and speak with your or your parents’ financial advisor. They can help you determine the best solution for your circumstance, and help you arrange the required financing.
Leverage your parents’ knowledge and experience
Once your financing is in place, there’s still a lot of work to do. You’ll need to find a realtor and go out and search for your perfect home. You’ll have to make an offer and close the deal. You may even have to hire movers and buy furniture, or make renovations.
Your parents likely have experience and connections that can make your journey to home ownership a lot easier. Their recommendations may even help you avoid expensive mistakes. It’s important to keep them involved, and they'll likely get a lot of satisfaction from being able to help.