For individuals under the age of 35, this overall economy has hit especially hard, with unemployment numbers double the national average. For 20 percent of mothers and fathers of young adults, the tough economy has been one aspect in their conclusion to help their children purchase a home. Source for this article: More parents helping their adult children buy homes
Buying a house with just a little bit of help
As reported by a December survey by Better Homes and Gardens Real Estate, about one in five self-identified baby boomer couples had assisted at least one adult kid in a home purchase. This assistance came in the form of down payment assistance, outright purchasing or mortgage co-signing. Many parents are digging into their savings in order to provide assistance for their grownup children; others are dipping into emergency funds or retirement finds in order to come up with the average $10,000 to $30,000 down payment for an American home.
Improving mortgage odds
Currently, mortgage rates are favorable for home buyers. The issue, however, is that many mortgage lenders are requiring between 15 and 20 percent down payments and very strong credit histories. Many grownup kids, faced with very high unemployment and a rough economic forecast, are simply unable to come up with enough money or a good enough credit history. Parents, on the other hand, are often in a stronger position, both on credit reports and in savings.
Personal loans can help build credit history, if used carefully.
Using a check
For parents or family members who wish to give loans to help in a home purchase, there is a bevy of financial regulation that must be considered. While outright handing over a check or cash can be the simplest, IRS limits must be considered. In 2012, a taxpayer is limited to giving $13,000 to any individual without paying the gift tax ($26,000 for married couples). Anything over that limit must be incorporated in a gift tax return filed with the Internal Revenue Service, and will be considered taxable to some extent. Taxpayers in 2012 were allowed to give up to $13,000 to one person without filing a gift tax return with the IRS. Married couples can give up to $26,000. It could be easiest to just hand over a check, but that may not fly with taxes. There is a ton of other financial regulation to consider for any person helping somebody else out in a home purchase.
Make it a loan
Family members may also provide direct loans to other members of the family, but it must be done carefully. The IRS requires a minimum rate of interest on these family loans, generally between 0.19 percent and 2.63 percent, dependent upon the term of the loan. These loans also need paperwork, including a formal promissory note and payment plan. Even for inter-family loans, it is best to consult with a lawyer to ensure that the paperwork is in order. You are also allowed to forgive a portion of the principle each year, though that principle will count toward the $13,000 gift tax limit.