Although parts of the economy are slow, one area where business is not slow is the real estate market. Sales are up, supply is low, and that means that costs and purchase prices are high.
For young people and those starting out, this can make the already difficult transaction of purchasing a home even more difficult. Add in the fact that many kids may be saddled with student loan debt, and you can see why many young people will look to their parents and relatives to help them purchase a home.
If you are that parent or relative, and you want to help a child buy a home, what are some considerations that you should have?
Gifting or Giving Money
You certainly can just give (or gift) some or all of the money to a relative. But before you do, you should check with a proper tax advisor for tax consequences.
That is because a donor can have tax consequences for gifting too much money. This may sound counterintuitive—after all, it is the child/recipient getting the money. Make sure you know the tax penalties for gifting, and if there are ways to avoid them.
Remember that the lender will want proof, usually in the form of an affidavit showing that the money given is a gift and not a loan. The lender wants the borrower’s money going to them, not to a parent who loaned money.
Loaning the Money
You can certainly loan the money, the same way that a bank would do. Make sure you have proper documentation of the loan, such as with a promissory note, detailing the repayment terms. Just as a bank would, you can also opt to have a mortgage, allowing you to foreclose if the loan is not paid back—but in reality, many parents will be hesitant to foreclose on a child, so make sure before you lend money, you are aware of what you will and will not be willing to do if your child goes into default.
That is especially true if you are only loaning part of the money-that is, paying some of the purchase price, with the bank paying the other part of the purchase price. If you loan $50,000 and the bank loans your child $50,000 and your child does not pay, and the bank forecloses, you could end up losing your $50,000.
You could opt to co-sign for the loan. The good with this option is you do not have to lay out or loan any money to anyone. The bad news is that you are on the hook to pay the bank back, and can get sued, or have your credit damaged, if your child does not pay.
Contact our New Jersey Real Estate attorneys at The Law Office of Agnes Rybar LLC for help and in purchasing a home or any property for yourself, or any family member.