Is your child trying to buy a home but keeps running into obstacles that prevent him/her from doing so? If that’s the case, you may want to help out, but what are your limitations? What do lenders allow?
We help you answer these questions and more below.
Help Your Child’s Credit
The first thing lenders look at is the borrower’s credit. What is your child’s credit like? Does he/she even have any? If they are just starting out in life, they may only have one or two trade lines. That’s not enough to come up with a credit score.
If you know your child has good financial habits, consider making him/her an authorized user on your credit card accounts. Make sure you set ground rules on how he/she can use the card and what you expect as far as paying the bill. If you continue to have timely payments and pay the bill off monthly, it could help your child’s credit score increase quickly.
If you would rather not have your child on your account, you can also co-sign for a credit card with a decently sized credit line. You take the same risk with this account as you will be held liable if your child doesn’t pay the bill, but you aren’t the primary cardholder. This leaves your credit lines alone while helping your child build up his/her credit.
Gift Money to Your Child
Is your child’s biggest obstacle the down payment? Don’t worry, he/she is not alone. Many new homebuyers come up short on the down payment. Many loan programs allow borrowers to accept gift funds, though, which means you can give money to your child to use for the down payment.
Conventional and FHA loans both allow the receipt of gift funds as long as the following rules are followed:
- Write a gift letter stating the reason for the gift, including the property address and the recipient’s name.
- Write a statement in the gift letter that ensures the money is a gift and not a loan.
- Provide documentation of the funds’ origination. If an asset was recently sold, proof of the sale will be required.
- Provide documentation of receipt of the funds and proof that you deposited them in the account you will use for the closing costs and down payment.
FHA lenders can allow the donor to provide 100% off the down payment. Conventional loan lenders may require that a portion of the funds come from the borrower himself, especially if you put less than 20% down on the home.
Go on the Mortgage
One more way you can help your child buy a home is to be on the mortgage itself. In this case, we don’t recommend that you simply co-sign on the loan. This doesn’t give you any interest in the home’s ownership. If your child defaulted, you would be liable for the debt, but could not take possession of the home.
As a co-borrower, though, you also go on the title of the home, which means you have part ownership. You have a say in what happens with the property, then. If your child can’t make the payments and you want to sell the home, you have that right. As a co-signer, you don’t have that right.
Most importantly, exercise caution when helping even your child buy a home. It’s a big undertaking that could harm your credit if you aren’t careful. If you know your child’s financial habits and are certain that he/she will remain in good standing with the loan, then it may be safe to help your child. If, on the other hand, you know your child won’t stay on top of things and may default, you may want to think long and hard before becoming a part of that loan. Simply giving him/her money or helping him/her build credit probably won’t harm you, but putting yourself on the loan is something that requires careful consideration.