The Gift of Homeownership: How to Help a Loved One on Their Journey

Rodd Miller, CMA, Branch Manager/ Sr. Mortgage Advisor/Reverse Division Manager

November 15, 2023 — 12 min read

When the time comes for a loved one to purchase a home, you want to do everything to help, especially in today’s housing market. Whether through sage advice, financial assistance, or just being there as a pillar of support—with your guidance, their journey becomes more than a transaction; it transforms into a testament of love and generosity.

Currently, the median home sales price in the United States sits at more than $430,000, up three percent from earlier this year; that's a 31% increase from 2020, when the median was $329,000.

Indeed, when we look back at the end of last year, housing affordability hit an all-time low. This means that many of today’s first-time homebuyers must get creative or risk renting for longer than they planned.

Here are some strategies and workarounds that you can employ to help turn their homeownership dreams into reality, even in today's competitive housing market.

How to Know You’re Ready to Own a Home

Stepping into homeownership isn't just a financial leap; it's a giant stride toward building a strong future and can help a loved one achieve their long-term goals. So, how do you know when the time is right?

LEARN MORE: Signs That You're Ready to Become a Homeowner

There’s a lot more to consider than interest rates and median home process, although those are important factors. Before anything else, start by helping them assess their current finances and aspirations by asking crucial questions:

Is their income stable, allowing for consistent mortgage payments?
Are their existing debts manageable, leaving room for additional financial responsibilities?
Do they have an emergency fund set aside to cover unexpected home repairs or financial emergencies without jeopardizing their daily expenses?
Have they saved for a substantial down payment? A larger down payment may result in a lower mortgage and better loan terms.
Are they aware of the closing costs associated with buying a home?
What is their credit score? A higher credit score can secure better mortgage rates, potentially saving thousands of dollars over the life of the loan.
Does homeownership align with their long-term goals, such as career ambitions, family planning, or retirement plans?

Strategies to Help a Loved One Purchase a Home

Navigating the mortgage market can be overwhelming, especially if your loved one is a first-time buyer. However, your support and guidance can make a significant difference. In today’s competitive real estate market, several strategies can be employed to help them achieve this milestone with confidence and financial prudence.

Help Them Explore Different Mortgage Options

One of the most impactful ways to assist a loved one is by encouraging them to explore different mortgage options and doing research to help.

So, where to begin? There are a few questions to answer to help dial in on the loan type that fits best:

Down payment: Determine the size of the down payment they can afford.
Government assistance: Check if they qualify for any government assistance programs.
First-time homebuyers: Establish if they qualify as first-time homebuyers.
Loan term: Consider whether a 15 or 30-year mortgage suits their needs.
Credit report: Assess their credit report to understand their financial standing.

Conventional loans

Conventional loans are a great option for someone with a stable income and a good credit score. These loans aren’t insured by government entities and are available through private lenders, such as PacRes Mortgage. In the realm of conventional loans, there are two primary categories:

Conforming loans adhere to Fannie Mae, Freddie Mac, or federal regulations, implying borrowing limits determined by local cost of living estimates; non-conforming loans lack these limits and, in general, are more competitive. These loans demand higher proof of income, better credit scores, and larger down payments.

Generally, individuals opt for conventional mortgages when they do not require or qualify for government assistance or first-time homebuyer programs.

FHA loans

FHA loans, on the other hand, are government-backed and designed to help buyers who are still building their credit, buyers who have limited funds for a down payment, or buyers trying to cover things like closing costs. Unlike conventional loans, these loans offer more lenient credit requirements and only require a down payment as low as 3.5 percent; however, borrowers are obligated to pay mortgage insurance, increasing their overall cost.

Generally, these loans are especially popular among first-time homebuyers and those who are still building financial resources and reserves.

VA loans

VA loans, a unique offering to eligible veterans, active-duty service members, and surviving spouses, are government-backed and facilitated through the U.S. Department of Veterans Affairs. Unlike conventional mortgages, VA loans typically require no down payment, providing a significant advantage to qualified borrowers; additionally, these loans often feature competitive interest rates and do not necessitate private mortgage insurance

Borrowers are eligible if they have served on active duty and have an honorable discharge, after a minimum of 90 days of service during wartime, or after a minimum of 181 continuous days of peacetime.

USDA loans

USDA loans, administered by the United States Department of Agriculture, are government-backed mortgages tailored for rural and suburban homebuyers. These loans are designed to promote homeownership in eligible rural areas, offering competitive rates and requiring no down payment, making them highly accessible for qualified borrowers.

To be eligible for a USDA loan, applicants must meet specific income requirements and the property they intend to purchase must fall within designated rural areas. Eligible applicants may build, rehabilitate, improve, or relocate a dwelling as a primary residence in an eligible rural area and may borrow 100 percent of the appraised value.

LEARN MORE: From Fields to Front Doors: What is a USDA Loan?

Jumbo loans

Jumbo loans, often referred to as non-conforming loans, are specialized mortgages designed for homebuyers seeking larger loan amounts than those permitted by conforming loan limits set by Fannie Mae and Freddie Mac.

Given their substantial loan amounts, jumbo loans involve stricter requirements. Borrowers are typically required to demonstrate excellent credit scores, robust financial profiles, and substantial down payments. Interest rates for jumbo loans may also be higher due to the increased risk

Reverse mortgage

Reverse mortgages are unique financial tools available to homeowners aged 62 and older. Unlike traditional mortgages, where homeowners make monthly payments to lenders, reverse mortgages allow seniors to convert a portion of their home equity into loan proceeds, which are typically received as a lump sum, monthly payments, or a line of credit.

These loans are a popular option for seniors who want to stay in their homes but need additional financial support. They can use the money from the reverse mortgage for any purpose, such as paying for healthcare expenses, home improvements, or daily living expenses.

Adjustable-rate vs. fixed-rate mortgages

When it comes to choosing a home finance option, borrowers may have to choose between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage.

Fixed-rate mortgages provide stability and predictability; when the rate is fixed, it means monthly payments remain consistent throughout the loan term. This reliability makes budgeting easier, providing homeowners with peace of mind. Fixed-rate mortgages are ideal for those seeking long-term financial security and planning to stay in their homes for an extended period.

Adjustable-rate mortgages (ARMs), on the other hand, offer flexibility. These mortgages have interest rates that adjust periodically based on changes in a specific financial index. Typically, ARMs start with lower initial interest rates compared to fixed-rate mortgages, making them attractive to buyers looking for lower initial monthly payments. ARMs are suitable for buyers expecting changes in their financial situation, such as relocating or refinancing, before the adjustable period begins.

Emphasize the Importance of Budgeting & Saving

Buying a house isn't something most people decide to do overnight. It requires careful planning and preparation over years, including budgeting to build up a down payment, pay off debt, improve their debt-to-income ratio, and more.

Prior to making a purchase, it's crucial for your loved one to understand their realistic affordability, encompassing not only the house price but also a budget for ongoing maintenance and repairs.

Saving for a substantial investment like a house might seem daunting, particularly while renting. However, with a well-thought-out strategy and expert guidance, you'll be surprised at what you can achieve.

Explore Joint Ownership

While purchasing a home is a significant milestone, it doesn't have to be solitary—joint ownership, involving multiple buyers, can be a practical and financially beneficial option. In fact, in recent years, about a quarter of all homes sold in the U.S. were sold to co-buyers, according to a report from CoBuy.

Friends, family members, roommates, business partners, and romantic partners might consider joint home ownership. However, it's crucial for the group to align on how they intend to share the deed to the property. Clear communication and legal agreements are essential to avoid potential conflicts down the road.

Encourage Them to Do Their Research

Just as with any large purchase, it’s important to do thorough research before committing to any neighborhood or piece of property. By gathering information about crime and local culture, school districts, and other legalities, they can make a more well-informed decision. Here are a few questions to ask to help ensure someone has found the right neighborhood:

How do the other homes in the neighborhood stack up?
How many foreclosures and for rent signs do you see?
How safe is the neighborhood and surrounding area?
How highly rated are the local schools?
Is the neighborhood walkable?
Does the neighborhood have an HOA?

Buying a Second Home for a College Student

Before you panic at the thought of a second mortgage, let's examine the long-term benefits of a second home versus paying for a child to live in university housing.

Investment Strategy

By investing in a different market of real estate outside of your primary residence, you have the potential to increase your investments.
Owning a second home also opens up the options for your living situation after retirement.
Owning instead of renting a home will also allow the home to build equity.

Tax Benefits

If you use the property solely as a second home without renting it out, you can claim mortgage interest deductions in the same manner as you would for your primary residence; as a homeowner, you can deduct up to 100% of the interest you pay up to $750,000 of the total debt that is secured by both the primary home and the second home.

If you're contemplating renting out your second home during the times you're not using it, you may want to consult a financial expert. Your eligibility for specific tax breaks depends on your unique situation, and a professional can provide tailored advice based on your circumstances.

Appreciation & Stability

Investing in real estate in college towns offers advantages in terms of property appreciation. The continuous influx of new students ensures a relatively high demand for homes in these areas. Even after your own college-aged child moves out, there's the option to rent the property to other students (however, you must be aware of the tax implications).

Additionally, your child can reside in the same property throughout their entire four years of college, eliminating the stress associated with annual moves, searching for new living spaces, dealing with security deposits, and managing storage fees. This stability not only benefits your child but also offers peace of mind for you as an investor and parent.

Options for Parents Helping Kids Buy a Home

As the holiday season approaches and families come together, discussions often revolve around real estate, especially the prospect of helping children purchase their first home. While gifting a down payment remains a prevalent method, there are several avenues parents can explore to support their children in this significant milestone.

Gifting a down payment

One of the most common ways parents assist their children in buying a home is by gifting them a down payment—in fact, more than 20 percent of buyers use down payment gifts to purchase their homes, according to experts. This approach can significantly ease the financial burden on the homebuyer, enabling them to secure a mortgage with a lower down payment requirement.

Tax implications of cash gifts

However, it's crucial to consider the tax implications associated with cash gifts, especially if the amount exceeds the IRS's annual gift tax exclusion of $15,000 per recipient. If the gifted amount surpasses this limit, it may incur gift taxes. In this scenario, consulting a tax professional becomes important, as they can provide guidance on the most tax-efficient way to gift a substantial down payment.

Cosigning the mortgage

One other option parents may consider to assist their kids in buying a home is cosigning their mortgage. By becoming a cosigner, parents share the responsibility of the loan with their children; this can enhance the child's eligibility for a mortgage, especially if the child has a lower credit score or is still building their credit history.

However, cosigning a mortgage comes with financial and legal obligations. Late payments or defaults can negatively impact both the child's and the parent's credit scores. It's imperative to thoroughly understand the risks involved and have open, honest discussions with the child about their financial responsibilities.

Now What?

Now that you know a bit more about loan options and what goes into purchasing a home, it's time to share that knowledge and help others take actionable steps. Click here to connect with a neighborhood Mortgage Advisor today, or check out other blogs here.

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