How to Help Your Kids Buy a Home: Gifting vs. Co-signing

 

Buying a home is a significant milestone for anyone, and with affordability becoming a bigger challenge every day, many parents want to help their kids get into their first home. There are two common ways parents assist their kids in purchasing a home: by gifting them the down payment or by co-signing on the mortgage. Both methods have their pros and cons. Let’s break it down.

Gifting the Down Payment

 

Pros:

 

• No strings attached: When you gift the down payment, you’re giving your children a financial boost without expecting anything in return.
• Easier qualification: Lenders may view gifted funds favorably, especially if they’re used for the down payment, as it reduces the loan amount and the risk for the lender.
• No Liability: You are not on the mortgage, so it won’t show up on your credit report or effect your ability to purchase another home yourself.

 

Cons:

 

• No control over the property: You will not be an owner of the home and you will not be on title.
• Impact on your finances: Gifting a large sum of money could affect your financial stability, especially in retirement.

 

As a parent who has gifted a significant sum, you may wish to protect your investment somehow. One way is to register a lien on title after possession. You can file this at the land titles yourself or have a lawyer do it for you. You can easily remove the lien in the future when it’s no longer needed.

 

Co-signing on the Mortgage

Pros:

 

• Helps with qualification: If your children have a limited credit history or income, co-signing can help them qualify for a mortgage.
• May lead to better loan terms: With a co-signer, your children may qualify for a lower interest rate or higher loan amount.
• Control over the property: As a co-signer, you have a legal interest in the property and may have more control over its use.

 

Cons:

 

• Shared responsibility: As a co-signer or guarantor, you’re equally responsible for the mortgage payments. If your children default, it could negatively impact your credit score.
• Limits on future borrowing: Co-signing on a mortgage could limit your ability to borrow for your own needs, as it increases your debt-to-income ratio.
• Strained relationships: Money can sometimes strain relationships, and disagreements over the mortgage or property could lead to tension between you and your children.

 

Deciding whether to gift the down payment or co-sign on the mortgage depends on your financial situation, relationship with your children, and personal preferences. It’s important to consider the long-term implications of each option and to have open and honest discussions with your children about your intentions and expectations. Consulting with a financial advisor and/or an attorney can also help you make the best decision for your family.

 

Your first call for all mortgage related questions should always be your Advanced Mortgage professional. Give us a ring today and we can “make cents of your mortgage!”