Goodspeed: Be careful when helping a child buy a home
QUESTION: Our daughter wants us to cosign on a mortgage with her. She plans to make all the payments and handle all of the expenses of the home, but I am reluctant to do this. We want to help our daughter, but I am not sure this is the best way to do it. What do you think?
ANSWER: Buying a home is difficult for young people today. Between rising home prices and large student debt, purchasing a home is tough for this generation.
Of course, parents want to help their children as much as possible, but you also need to carefully consider your own future.
Co-signing on a mortgage sounds like the easiest, most pain-free way to help a child purchase a home. But even if your daughter expects to make all payments, in the eyes of the lender, you are 100 percent responsible for the loan. If something happens to her, would you be able to easily step in and cover the mortgage, property taxes and insurance?
If your daughter is single and you co-sign with her, at the very least, you should require her to take out a term life insurance policy with you as the beneficiary. The proceeds from the death benefit could be used to cover the mortgage until the home can be sold.
Beyond death, heaven forbid, there are other risks: Your daughter could lose her job, become seriously ill or injured. At the risk of sounding like a Debbie downer, co-signing is not as simple as it sounds.
Are there other ways you can help? If you can afford it, a gift is the cleanest way to help a child purchase a home. You can gift up to $15,000 without any tax implications. Of course, you can give more, but you will have to file a federal gift tax return. If your daughter uses a gift towards a down payment, you will have to submit a letter to the lender, verifying that the money is indeed a gift and you have no expectation of it being repaid.
If you can’t afford an outright gift, consider a loan to your daughter. Again, you need to weigh your own situation carefully. If you intend to pull money out of a traditional 401K or IRA to cover the loan, you will not only pay taxes on the amount, but it could bump you up into another tax bracket.
If the money you give your daughter is a loan, the lender will factor it into her debt-to-income ratio when calculating how large a mortgage she qualifies for and at what terms and interest rate. Also, you need to adhere to IRS lending rules and charge her interest on the loan. Each month, the IRS publishes minimum and long term interest rates. Check with an accountant to make sure you are following these lending rules.
Wanting to help your child is a natural tendency, but you need to think of your own future and retirement.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: email@example.com.