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Your Mortgage: Parents helping kids... again

 

by Mike Miles

December 18, 2018

 

Mike Miles

By Mike Miles

There is something about being a parent that never leaves … the desire to help your kids. Now, whether parents should always help their kids … that’s a different topic for a different time. In present-day society we are seeing more and more parents helping their kids with life situations well into the kids’ 20s and 30s. One of the life situations in which we are seeing an increase in parental support deals with buying a home. Today’s post will identify a few ways that parents can help their kids. (If that’s what they want to do).

Let’s start with something small that can have a dramatic impact – adding a child as an authorized user to a credit account. It’s normal for younger people to have lower credit scores. One of the reasons why is because their credit history isn’t as deep (length of time) nor substantial (amount of available credit). Adding children to a credit card(s) as an authorized user can boost their credit ratings. Of course, the account needs to be in good standing, otherwise it can have the reverse effect. The longer the account has been opened and the more available credit (balance compared to the high limit) the better the boost. Boosting a credit score could help them qualify for a mortgage loan. Adding them as an authorized user is easy and can be done by contacting the credit card company.

Another way to help is to provide your child with down payment funds. Parents do not need to be involved in the transaction (not signing the purchase contract or loan application) other than being prepared to provide some documentation associated with their financial assistance. This is called a gift of a down payment and it’s quite normal. The amount of the gift isn’t restricted, and the required documentation includes a signed gift letter identifying the parties involved, the amount of the gift, and the source (account) of the funds to be used. If parents are concerned about tax consequences, we will always refer them to speak with an accountant or tax professional.

A third way to help is for parents to be a co-signor on the actual transaction. This is the most involved way of helping (unless a parent is literally buying a house with cash for their kids … which we saw during the competitive market this past year). This is where a parent(s) and child(ren) all participate in signing transaction documents (contract and loan application) and provide income and asset documentation as required per underwriting. Doing it this way does make the parents just as liable for the note as the kids.

Whenever we see one of these situations happening, we will schedule a meeting or a conference call with both the parents and children to help line out expectations. Parents are often the ones who have the most questions and rightfully so. It’s important to know all the possible ways to help … especially if the parents are eager to get their kids out of their house…:)

Mike Miles is one of the owners of Fountain Mortgage. You can find his column in the Shawnee Mission Post every Tuesday.