New homebuyers today are confronting the dual challenges of higher mortgage interest financing costs and elevated home prices. Many economists expect these conditions to ease in coming years, but in the meantime parents and family members with available resources may be able to make the dream of owning a home a reality for their family members.
Mortgage interest rates in the U.S. recently exceeded 7%, the highest rate in more than two decades. In the past, higher mortgage rates tended to put downward pressure on home prices. Yet even with today’s higher interest rates, home prices in most states continue to rise, making it one of the most difficult times ever for first time homebuyers to enter the market.
One way to offset higher interest rates on mortgages is to minimize the size of mortgage by increasing the cash down payment on a home purchase. But for first-time homebuyers who are early in their working careers, coming up with more than a minimum down payment may be out of reach.
We are often asked how a parent or other family member can help with a home purchase. The most direct way to assist the homebuyer is by making a gift of cash towards the down payment. In addition to reducing the size of the mortgage, a larger down payment also may avoid the need to pay Private Mortgage Insurance (PMI) premiums each month. PMI is an insurance policy required by most lenders to protect them in the event a borrower is unable to pay their mortgage. Most lenders will not require PMI if the down payment is at least 20% of the purchase price of the home.
A gift of cash to an individual below the federal gift tax annual exclusion amount (currently $17,000) has minimal tax requirements. The total amount of cash able to be gifted may be a multiple of the annual exclusion amount if married spouses each make a gift (called a “split gift”), and if a married couple is the recipient of the gift. Split gifts are subject to conditions and may require additional tax filings. Gifts exceeding the exclusion amount have gift and estate tax implications. You should discuss any plan to make annual exclusion gifts with your tax advisor.
Lending money to help purchase a home may be another option, either in combination with or in place of gifts of cash. If properly structured, a private loan could allow a parent or family member to lend money at a lower interest rate than a bank. Because private loans could have income tax consequences to the lending individual, they should be discussed in advance with a tax advisor.
Serving as a co-signer is an additional way that a family member may be able to help with a home purchase, particularly if the primary borrower’s credit rating is below what is required by the lending bank. A co-signer is required to assume mortgage payments in the event the primary borrower defaults. This and other requirements of a co-signer must be carefully considered before agreeing to co-sign a loan.
With a little financial help, home ownership is still an achievable part of the American dream. As a parent or family member doing the “helping,” just be sure that you are aware of all tax and legal implications in advance.
Stephen Kenney, CFA, CFP is Director of Client Development at Gray Private Wealth, LLC, a wealth management advisory firm located in Canton, MA. He can be reached at (781) 232-2020 or firstname.lastname@example.org.
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