Cosigning a Mortgage Loan in Florida: How to Help Your Kids in the Homebuying Process
With the average house costing northward of $300,000, homeownership remains a pipe dream for most Americans. Millennials and young adults have it particularly bad because they're burdened by expensive student loans, high credit debts, and a high cost of living.
Recent studies indicate that the average American has trouble meeting a $400 emergency. Such financial strife is increasingly pushing parents to help their children accelerate their homebuying journey.
The National Association of Realtors found that 23% of the homebuyers under 37 years relied on mortgage gifts. About 6% used loans from family and friends to jumpstart their homeownership.
Besides cosigning a mortgage, you have plenty of options to help your child break the renting cycle and become a homeowner.
Dig in as we detail how you can help your child become a homeowner while avoiding the expensive pitfalls.
Should You Buy Your Child a Home?
Helping your child become a homeowner can be richly rewarding, but only if correctly. Given the long-term financial implication, it's advisable to seek guidance from a financial advisor.
But it would be best if you weigh both sides of the scale before making the leap.
- You help your child start their homeowning journey on the right note.
- It carries significant inheritance tax benefits.
- You can help your child avoid predatory lenders and loan terms.
- Tanking credit score if your child fails to repay the mortgage.
- A sizeable dent in your nest eggs.
- Your child could become entitled or financially dependent.
Considerations Before Helping Out
One of the upsides of helping your children buy a home is helping them break the cycle of renting. Cosigning a home loan accelerates your child's homeowning journey to let them start building equity from an early age.
Did you know that cosigning a mortgage amounts to creating a business relationship with your child? It takes proper planning and communication to pull it off without straining your relationship or ruining your finances.
Here are some critical factors to consider before going down this road.
How Will it Affect Your Relationship?
Tight bonds between a parent and a child are special, but lending or gifting a large amount of money can alter these dynamics. Your kids may feel overly indebted to you, which could stress your relationship.
You may consider seeking out a family counselor to help you forestall any hiccups that may result. Tackling such issues beforehand ensures things don't get out of hand.
Don't Over-leverage Yourself
It's only natural for parents to go the extra mile for their children. However, being overly generous may hurt your financial well-being. Giving beyond your means or failing to plan appropriately may jeopardize your finances.
Dipping into your retirement funds could leave you destitute during your sunset years. It could further strain your relationship with your child since they may feel responsible for your predicament.
A financial advisor can help you determine how much you can give without compromising your financial health.
Draft a Legal Agreement
It may seem like overkill, but financial disagreement can quickly sour the parent-child relationship.
A duly signed legal agreement sets the ground rules and defines the expectations. It ensures all parties are on the same page and helps to temper expectations.
A quick referral to the document can help de-escalate any disputes and safeguard your relationship with your child.
Keep Your Affairs in Order
Cosigning a mortgage with your child can be complicated because it affects your estate considerably. You need to be sure how the gift money fits into and affects your overall financial plan. That's especially important when you have other children.
How does helping one sibling with their mortgage affect their inheritance? Will the loan count as part of their inheritance if you pass away before the child pays you back? Seeking legal advice can help you iron out such kinks.
Let Logic Prevail
It's natural to dote on your child and want nothing but the best for them.
However, you shouldn't get emotional when cosigning a loan. Let logic prevail so you can address all the different moving pieces.
The loan will have complicated financial and tax implications that need addressing. Seeking legal or financial assistance can save you considerable heartache later.
Home Buying Assistance Options
You have plenty of options if you wish to help your child kickstart their homeowning journey on a high note.
The options range from letting them move back in, cosigning a mortgage, offering a down payment gift, or buying a house outright.
Each of these options comes with special consideration and even challenges that you must address from the outset.
Rent Your Child their Old Room
Having your child move back in with you is a convenient way to help them lower the cost of living.
High cost of living, expensive students, and credit card debts often trap young adults in a renting cycle. High debt makes it impossible to raise a down payment or even establish a saving culture.
Renting out the space to your child can make the situation less awkward while creating a win-win situation. Although the rent may be well below the market value, paying the rent will make your child feel accomplished.
It's a win-win situation because your child saves more money than they would when living independently. You can apply the rent money towards paying off your mortgage.
But, how much rent should you charge? Since the ultimate goal is to accelerate their homeownership journey, the rent amount should be fair.
These considerations should help you establish a great payment plan and timeline.
- What's the going rate per room in your neighborhood?
- Will they contribute to the cost of utilities, electricity, and food?
- Are you willing to mitigate some costs if your child helps around the home?
- How much rent can your child afford?
- How will this living arrangement help their financial goals?
Highlights of renting out a room
- Your child can build considerable savings.
- The rent money can pay off your mortgage.
- Be pragmatic about the rent amount to ensure its mutually beneficial.
- Review boundaries and guidelines to accommodate the changing dynamics now that your child is all grown.
Offer a Mortgage Gift
A down payment gift is an effective and legally accepted way to accelerate your child's homeownership journey.
As the name suggests, a mortgage gift is a no-strings-attached monetary gift to bolster your child's home deposit.
Raising the required 20% deposit allows your child to secure affordable mortgage rates and avoid private mortgage insurance.
Securing low-interest rates lowers the cost of the home and allows them to build equity faster.
The IRS allows parents who jointly file their taxes to collectively donate up to $32,000 as a mortgage gift to any of their children.
Mortgage gifts over this amount will attract gift tax that ranges from 16% to 40%.
Highlights of a mortgage gift
- Home deposit gifts make homeownership more accessible.
- Mortgage gifts can help your child secure attractive mortgage rates.
- A mortgage gift is less formal compared to a typical loan.
- A married couple can donate $32,000 for each of their children.
- A financial specialist and IRS gift guidelines can help you evaluate the size of the mortgage gift.
- Raising a sizeable down payment lowers the overall cost of the house.
Cosign and Buy a House with Your Child
If you're not in a position to loan or offer a mortgage gift, you may co-sign your child's mortgage. By cosigning a home loan, you allow your child to ride the tailcoats of your stellar credit score and history.
Cosigning works when your child has an adverse credit history that precludes them from qualifying for a mortgage. It's also helpful when your child is self-employed and hasn't met all the lender's mortgage requirements.
Cosigning strengthens your child's mortgage application and increases their chances of qualifying for one. It also allows your child to qualify for a higher loan amount to purchase a nicer home.
Cosigning a mortgage with your child is a delicate financial undertaking with immediate and far-reaching consequences. It calls for a special parent-child relationship governed by mutual respect.
One misstep from your child could ruin your stellar credit and plague you with many financial woes. Therefore, you should approach the process with utmost care.
Before cosigning a mortgage, each party should be crystal clear on their role and responsibilities.
Take a fine-toothed comb through your child's finances to understand their income, spending, and financial habits.
Be ready to bail out if you encounter nothing but red flags. Never buckle under familiar expectations to cosign a loan for your child if they're not financially responsible.
Your relationship might suffer in the short term, but that will save you tons of financial strife later. Cosigning a mortgage carries real-world financial risks that could ruin your financial stability.
By cosigning a home loan, you're ceding your financial well-being to someone. Therefore, you must vet them to the highest level to ensure they'll not drop the ball.
Some potentially negative consequences of cosigning a mortgage include being held liable for the payment. As a co-signer, you're legally liable for the payments, which may drastically lower your disposable income.
If your child defaults on payment, the bank may require you to pick up the slack. If you're a pensioner, the unexpected payments may drain your egg nest, subjecting you to financial uncertainty.
Have a financial expert pore through your child's financial records and then make an impartial recommendation.
It may seem overkill, but you should cover all bases if you're putting your life savings and credit on the line. A deep dive may help your child purge bad habits and improve their financial habits.
Highlights of Cosigning a Mortgage
- Great for a child with poor credit history but has cultivated great financial habits.
- You're on the hook if your child defaults on payments.
- Cosigning a loan may impact your eligibility for federal assistance programs.
- Cosigning has financial and tax implications.
Buy Your Child a Home
If your finances allow it, you may consider buying a house for your child. However, there's more to it than buying a property and transferring it to your kid.
Failing to plan appropriately when gifting a house to your child may trigger gift tax, as high as 40%, depending on the home's value.
You can work around the gift tax by gifting your child a qualifying percentage of the deed each year. That means it'd take years for your child to take full ownership of the home, but the 40% tax savings make it worthwhile. Your child must understand why you can't transfer ownership outright.
You can have the discuss the process with a legal or financial expert. That'd help them understand the value of the tax savings and why you must do it by the book.
The enlightenment may help the dynamics of your relationship and keep the child from resenting you. Resentment may build up if they feel like you're holding the house over their head.
Still, make your child aware of the responsibilities that come with homeownership. Ensure they understand the cost of maintenance, property taxes, home value, and the valuation process.
Helping them understand the value and cost of owning a home can improve their money management skills.
Highlights of gifting your child a house
- It's ideal for a child living in a high-cost area, struggling financially, or still in school.
- It paves the way to help your child achieve other financial goals.
- Examine how such a generous gift may affect your relationship and take any corrective measures to avoid a falling out.
- Understand the dynamics of gift tax and how to avoid triggering it
- Build your child's homeownership knowledge to understand the gift's actual value fully.
Sell or Gift Your House to Your Child
Sometimes it's easier to sell your house to your child. You may sell your home to your child when moving, downsizing, or wish to give them a leg up. Regardless of the reason driving you to sell or gift your child a house, the process is subject to many caveats.
Selling your home to a child falls under a non-arm's length transaction because there's a personal relationship at play. Still, you should conduct due diligence when selling to a stranger.
Have the property inspected, set the selling price, and draw up the purchase agreement. Consider hiring a title company and an attorney to ensure a flawless process.
How should you price a property you're selling to your child? You must follow protocol when pricing your home for sale.
Evaluate the home's current market value and how much mortgage is left. If you sell your home for less than what's left on the mortgage is classified as a short sale and requires a signed affidavit.
On the flip side, if you wish to gift your child the house, you must navigate the gift tax landscape. The gift tax may take the form of an equity gift or a capital gain if your child puts the home on the market too soon.
Hiring a professional home inspector ensures that you're not selling your child a lemon, which could sour your relationship for life.
Highlights of selling or gifting your child a house
- It allows you to downsize or move while keeping the property in the family.
- You can offer your child a hefty discount.
- Keep the tax implications in when pricing the house.
- You may not need a realtor to close the deal.
- Get property legal assistance and have the property inspected.
Creative and Cost-free Ways to Help Your Child Buy a Home
If you're not in a position to offer monetary help, you can still provide valuable help.
You can count on your extensive homeownership experience to help your children avoid crucial home buying mistakes.
You can count on your experience to help them snag the best mortgage terms.
Use your Connections - You may connect your children with attorneys, CPAs, realtors, and bankers in your network. If you've built a career along these lines, you can put your skills to use and cover their cost.
Help them with research - Buying a home is a delicate yet complex process requiring extensive research. You can dedicate much of your free time to conducting mortgage and market research for your child. You can unearth a treasure trove of beneficial information, including grants and particular loans for first-time homeowners.
- Help with home renovation - If you're handy with a tool, you may apply your skills to help your children with home improvement projects. Updating jaded décor, painting, improving curb appeal, landscaping, etc., are proven ways to grow property value.
The Bottom Line
Besides cosigning a loan, there are multiple ways to accelerate your child's homeownership journey. Before going down this road, take a minute to evaluate how such a huge gift can affect your relationship.
You want to make sure that your child understands and appreciates your help. The last thing you want is your generosity to strain your relationship with your child.
Check with a financial advisor to ensure you're overleveraging your finances. A legal expert can help you navigate the complex tax landscape when helping your child buy a home.
With over 50 years of mortgage industry experience, we are here to help you achieve the American dream of owning a home. We strive to provide the best education before, during, and after you buy a home. Our advice is based on experience with Phil Ganz and Team closing over One billion dollars and helping countless families.
About Author - Phil Ganz
Phil Ganz has over 20+ years of experience in the residential financing space. With over a billion dollars of funded loans, Phil helps homebuyers configure the perfect mortgage plan. Whether it's your first home, a complex multiple-property purchase, or anything in between, Phil has the experience to help you achieve your goals.