The Housing Scene

Helping Your Kids Become Homeowners

The decision to buy a home instead of renting may be in your kids’ DNA -- their housing DNA, so to speak.

According to new research from the Urban Institute, a nonpartisan think tank, if Mom and Dad are homeowners instead of renters, the likelihood of their children becoming owners increases 8.4 percentage points.

Parents’ net worth is also a factor. Of millennials whose parents’ net worth is below $10,000, only 14 percent are homeowners, versus 36 percent of those whose parents have $300,000 or more in net worth.

Wherever you and your children stand in this equation, it’s entirely likely that, should one or all of your kids want to buy a house, you are going to have to dip into your pocketbook to help. Research says coming up with even 3 percent down is a true burden for many young buyers.

Fortunately, there are several ways you can grease the skids for the kids. Here are a few:

-- Loan. If they are short on cash, a loan from you can be a big help. At the same time, though, your loan will be held against them when they apply for financing.

In other words, the monthly payments to you will be counted as debt, which will impact their all-important debt-to-income ratio (DTI). If they carry too much debt -- maybe a couple of car loans, one or more credit card balances, student loans, child support -- they won’t make the cut.

Actually, lenders consider two different DTIs. One is the front-end, which is your housing expense-to-income. The other is the back-end: your total monthly obligations-to-income ratio. The former is your proposed mortgage payment, which includes principle, interest, taxes, mortgage insurance and homeowners insurance, divided by your gross monthly income. The latter is your gross monthly payments, including the mortgage payment, divided by your gross monthly income.

Loan programs differ. The Federal Housing Administration allows a back-end DTI of up to 54.99 percent on loans it insures. But most lenders limit it to 50 percent, with some capping it at 45 percent.

-- Gift. Most loan programs today allow family members, employers and even friends to give young homebuyers some or all of the money needed for a down payment. But if you decide to go this route, realize that it is a true gift, not a wink-wink “loan,” and it need not be paid back. You will be required by the kids’ lenders to write a letter stating just that.

Don’t try getting around this, either. Most lenders today want applicants to trace the history of any large deposits into their accounts so they can see where the money really came from.

How large a gift is allowed? It depends on the lender’s rules. For government-backed loans, the entire down payment can come from a gift if your kid’s credit score is above 620. A score lower than that requires 3.5 percent of the loan amount to come from the borrower’s own funds. For conventional loans, the down payment in its entirety can be gifted if the borrower is putting at least 20 percent down. A smaller down payment means the borrower will need some cash of his own.

If your child ends up picking a loan that doesn’t allow monetary gifts, perhaps you can donate it in another way: help defray moving costs, for example, or pay for any needed repairs or the first few mortgage payments.

-- Co-sign. This is considered one of the least favorable steps parents can take, because it puts their own financial futures in harm’s way. Co-signing means you are a co-borrower. So if your child fails to make the house payment for one reason or another, you’re on the hook for it. And if the house goes into foreclosure, that goes into your credit record, as well as Junior’s.

If your child is responsible and has the means to make the payments, but just needs help with the down payment, co-signing can work. But any mistakes will impact your ability to obtain credit of almost any sort in the future: a loan for your own new house, car or even a credit card.

-- Roth IRA. Setting up a Roth IRA in your child’s name could be a useful approach, but it takes some planning. It needs to be set up long before the homebuying process even begins.

Roth IRAs can be funded with up to $5,500 annually, as long as the amount you deposit doesn’t exceed your offspring’s earnings for that year. The money you put into your own Roth IRA will grow tax-deferred until you make a withdrawal. But your daughter or son can take a distribution of up to $10,000 for a first-ever home purchase, without penalty or taxes, as long as the account is at least five years old. Check with your accountant for further information.

-- Start a fund. Money placed in a Roth IRA is tax-free. But you also can open your own investment account on your kids’ behalf to help them later in life. Start while they are young, and you’ll be surprised how much money you’ll have put away by the time they want to settle down in a place of their own.

-- Education. One of the best things you can do for your children now doesn’t involve money at all: Teach them all about the costs and rigors of homeownership. Talk about how to build and maintain good credit, and explain why it’s important. They may not know that credit impacts almost everything they will do financially -- from getting their own cellphone account to obtaining affordable car insurance.

Explain to them -- even better, show them -- exactly what it costs to pay for your own house, including principle, interest, taxes, insurance, home association dues, utilities, maintenance and upgrades. And be sure to tell them what happens if an owner gets behind in their house payments: that they could end up losing their home.

The younger they learn these financial lessons, the better.

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