With the holiday spirit in the air this time of year, it’s hard not to think of what you can do for people – especially when it’s your own family. Whether it’s a wedding gift or a Christmas present, parents with the funds available are often using them to assist their children with buying their first home. If you yourself have been thinking about doing so, here’s a few ways you can do it.
Those who have sufficient assets can loan money to relatives for the purchase of a home in lieu of traditional mortgages. Situations like this can be profitable for the lenders because they’ll typically get a better interest rate than they would on a typical investment vehicle from the bank like a CD. On the side of the borrowers, the fact that they answer to mom and dad instead of a financial institution might help should financial difficulties arise. When someone loses a job, the mortgage is still due. If the lender is in the family, though, they might be more willing to negotiate something that will help their relatives out.
Though it’s coming from family, the loan will still follow the IRS’s proscribed interest rates based on the term of the loan. If the loan isn’t intended to be an investment, and the lender isn’t interested in earning interest, up to $14,000 in interest can be forgiven each year under gift tax exclusions (or up to $28,000 if gifted as a couple). Any interest earned above this must be reported to the IRS as taxable income.
Co-signing the mortgage
If your child or relative’s income is too low to qualify for a mortgage, co-signing can help. When co-signing, the parents’ income will be under just as much scrutiny as their kids’, and in order for a co-signing to be successful the parents must be able to show that they can take on the burden of home payments if the children are unable to. Also, the loan will show up on the credit report of the co-signers as an outstanding debt, making refinancing difficult down the road.
The holiday season can bring out the generosity in us all, but before assisting your children or relatives with the purchase of a home, make sure you consult a financial adviser.