Recently Redfin’s chief economist, Daryl Fairweather, coined a new subset of homebuyers. The group had a few attributes in common: They’re millennials and Gen Zers, mostly. They desperately want to buy a home. But by and large they’re not applying for mortgages at Chase or BofA. They’re looking for help much closer to home.
Fairweather calls them “nepo-homebuyers,” and they’re much more common than you might think. Earlier this year, Redfin conducted a survey of recent movers and found 38% of more than 500 buyers under the age of 30 either used a cash gift from a family member or an inheritance for their down payment.
Her play on nepotism is a nearly perfect way to describe our current housing market, one of deteriorated affordability that’s fallen to levels unseen since the height of the housing bubble. And family money, seemingly now more than ever, matters. “It seems like the only way to kind of get your foot in the door to the housing market is to have some help,” Fairweather previously told Fortune.
Just think, if your child was trying to buy a home in California, where the average home value is close to $750,000, to put 20% down they would need $150,000. Their monthly mortgage payment at a 7.7%, 30-year fixed rate would be roughly $4,278. Let’s say they were looking to buy in a more affordable state, like Texas, where the average home value is around $300,000. To put 20% down they’d still need $60,000—much lower, but nowhere near affordable. So parents and family members are stepping in to help, and there are a few ways they can do so, some better than others depending on an individual’s financial situation.
In Fairweather’s case, when she was 27, her mother sold her condo and gave Fairweather the money to put toward a down payment, so that she could buy her own home; they lived together until Fairweather built up enough equity to then buy her mother a new place. “Had it not been for her doing that, it would have taken me years to be able to afford a home of my own,” Fairweather said, later adding that “year after year, prices kept going up.”
Scott Kyle, chief executive and chief investment officer at Coastwise Capital Group, a San Diego-based boutique money management firm, said he’s seen an uptick among his clients looking to help their children buy a home. And there are always pros and cons involved in this very personal decision. First and foremost, as a parent looking to help a child purchase a home, you have to make sure you’re financially capable, and that whatever you do, you can afford it. Still, even if you can afford it, you want to make sure that you structure the agreement such that it won’t impact you, particularly in terms of credit, Kyle explained. Nevertheless, there are different ways parents can help, some more common than others.
Buying a home for your child in cash
Likely the most extreme version of this is when a parent can afford to buy their child, or children, a home outright. The easiest way to do that would be to pay in cash, therefore avoiding skyrocketing interest rates. But again, in this case, it’s important to establish whether or not you’ll be expecting any kind of repayment, or if it’s simply a gift. And parents should consider utilizing the lifetime gift tax exemption, which for this year amounts to $12.92 million.
Cosigning your child’s mortgage
Another option, Kyle said, is cosigning a mortgage. If a child doesn’t qualify for the loan (which could be because they lack a sufficient credit history or have outstanding student loans, for example), but can afford to buy the home, their parents can cosign. In this case, the parent would assume the debt if their child falls behind on payments. So, yes, this is a way to help without actually providing any money, but your child has to be dependable. If not, you’ll be responsible for their mortgage, potentially on top of your own. Sort of in the same vein as cosigning, parents can co-own a home with their child. If, or once, they decide to sell, their parents share the profit. Or at some point, when they can afford to do so, the child can buy their parents out.
Gifting, or lending, your child a down payment
Then there’s the option of helping with a down payment, which again can take many forms, whether that be a parent gifting their child the entire down payment, or contributing toward it, or lending it to them. In the case that they’re giving their child money for a down payment, with no expectation of repayment, parents should consider either utilizing the lifetime gift tax exemption mentioned above, or the annual gift tax exemption, which for this year is $17,000 (or $34,000 for married couples). If you’re lending your child the money for a down payment, make sure to set up a payment plan, so both parties are completely aware before coming to an agreement.
Consider this: A $500,000 home, which Kyle joked would really get you only a small starter home in Southern California, the down payment would be $100,000. So if a parent wanted to gift their child $100,000 as a down payment for their first home, “they want to be sure they’re not being taxed on that money,” he said. It’s important to consult with a tax professional, but in that case the lifetime gift tax exemption would likely be the go-to, given $100,000 exceeds the amount allocated as the annual gift tax exemption.
But here’s something to think about, and prepare for: Helping your child buy a home, particularly if it’s their first, can be a really good thing, but “you can’t assume that things are always going to go well,” Kyle said. People lose their jobs, they get sick, stuff happens. So as a parent helping their child, whether that be in the form of cosigning their mortgage or lending them a down payment, you have to account for the fact that things might not go according to plan.
