By Debbie Gardner
dgardner@thereminder.com
There’s no question that buying a home in the 21st century is an expensive proposition. This fall, the median price for a home in Western Massachusetts was over $405,000. With mortgage rates still hovering close to 7%, the combined cost of buying a house, and financing that purchase has become just too tough a nut for many young would-be homeowners to crack.
But that’s where, increasingly, parents are stepping in to help. According to figures in a March 14, 2024, online article by Credit Karma, 37% of recent Gen Z homebuyers nationwide have received financial assistance with a first-time home purchase from their parents. (“Gen Z looks to friends, parents for help purchasing a home, study finds,” https://tinyurl.com/3ju4a9dp).
That’s a trend playing out with first-time homebuyers across the Valley as well, according to realtor Kim Kehoe with The Nelson Team at Real, an Agawam-based realty company.
“The assistance is crucial for younger generations, especially with increased housing prices and stagnant wages,” Kehoe told Prime. “The reliance on family support … Is helping some buyers overcome financial barriers and enter the market sooner than they would be able to on their own.”
Kehoe shared that she’s seen parents – and sometimes grandparents – offering homebuying help in one of three ways.
“The most common way is gifting [the couple] money. The second is co-signing, though that can get you in trouble. The third method is a personal loan,” Kehoe said.
The Bank of Mom and Dad
Kehoe stated that nationally, about 33% of first-time home purchases involved help from a parent. In Western Mass., she said at least 25% of home purchases in 2023 involved either a parent or grandparent gifting money.
Kehoe said she’s heard parents refer to this help as “giving them their part of an inheritance early.”
Jason Jean, a loan consultant with New American Funding who works closely with The Nelson Team, told Prime he often sees the need to approach parents for help come up when a couple is applying for a home loan. And the size of those gifts can vary, Jean noted.
“Usually, it can be anywhere from the deposit to a small percentage of the down payment,” Jean said, though he has seen instances where parents “give gifts of hundreds of thousands of dollars.”
The larger gifts, Jean said, are where parents need to be aware of how state and federal gift tax laws and limits may affect the outcome of their financial help. He noted it is prudent to consult a qualified tax or estate attorney when planning a large gift to help children purchase a home.
Prime finance and estate planning columnist, Atty. Gina Barry with Bacon Wilson PC., concurred. Though there is no Massachusetts state tax on financial gifts, there is a federal tax, with a lifetime exclusion limit of $13.61 million, after which any gifts are taxed. Regardless of the amount given in a filer’s lifetime to date, a federal gift tax return must be filed for gifts exceeding $100,000 in a single year, Barry stated.
Barry explained there is also a federal limit on yearly gift size without filing a federal gift tax return. In 2024, that limit, Barry said, is $18,000 per person. “But if a husband and wife each gift a child and their spouse, and the husband gives each $18,000 – that’s $36,000 – and the wife gives $18,000 each – that’s another $36,000, that’s a total of $72,000 without having to file a federal gift tax return,” Barry said. The same ruling applies if it is a grandparent gifting money to a grandchild.
Barry also stressed that these gifting laws apply to U.S. citizens. “For non-U.S. citizens, there are limits that this article does not cover, and those individuals should seek additional information before making a gift,” Barry said.
The co-signing option
Kehoe said co-signing – or co-ownership – is another option some parents have used to help children purchase a home. She’s seen it in muti-generational housing situations, though even there Kehoe said it’s not common.
Jean said he sees the co-signing option “less often” than other ways parents can help. “But it is definitely not uncommon.”
However, both Kehoe and Jean noted the long-term implications for the parents are often a stumbling block to this form of help.
“A lot of people don’t want to co-sign because they are afraid of what the accountability will be later,” Jean said. “But typically, lenders can exclude the debt if 12 months of payments are made on time by the children. When parents understand this, they are more likely to do it.”
Jean said that proper documentation will show that the mortgage payments came out of the children’s account, and not the parents. However, if there are missed payments the co-signing option may affect the parent’s credit long-term.
“The co-signer is legally responsible for the debt, and missed payments reflect on their credit,” Barry concurred. Also, “a lender may require two years of on-time payments before a co-signer can be removed, depending on the terms of the package,” Barry added.
Family loans
Both Jean and Kehoe said that they have seen home purchases include a family loan to help with various parts of the process, from the down payment to the closing costs. However, both cautioned that this type of arrangement also requires specifics in terms of a payment plan, and advised the parties to consult a lawyer to help draw up the proper documents to avoid any animosity or issues down the road.
Barry said that a family loan may be considered a second mortgage by some lenders, with the financial implications that this type of debt can imply.
Parental risks
Kehoe stressed with any of the options, that parental involvement in a child’s home purchase has both benefits and risks.
“For parents, offering financial assistance can strain retirement savings or liquidity. It may also limit their ability to make future investments,” Kehoe said. “For children, while the assistance makes home ownership more attainable, it can lead to a dependency or financial entanglement, especially in the case of family loans ... Parents and children both need to weigh these risks carefully and speak to their accountants regarding their individual situations.”
Barry also stressed that the gifting option may also have an effect on the parent’s – or grandparent’s – ability to apply for Medicaid assistance with long-term care if that need falls within five years of the gift, another factor for all parties to consider.
With any type of financial assistance to a child, Barry said the parents should consider the inheritance implications and may want to adjust their estate plan to reflect early gifts if there are other children or heirs involved.
And other issues
Both Kehoe and Jean said parental involvement in the finances of purchasing a home can also spill over to other areas of the process, such as home selection.
“If parents are gifting [money] to their child, they often feel they should have a say [in the home selection],” Kehoe noted.
Jean said he has seen deals fall apart over parental involvement.
“I’ve seen [parents] steering them away because of a small inspection issue that could be easily fixed,” Jean said.
Bottom line, Kehoe and Jean agreed that the level of involvement between the parents and their children should be clear from the outset to make the home buying process go as smoothly as possible.
“If anyone else is going to have an impact on the purchase, bring them along [from the beginning],” Kehoe said.
But the bottom line, Jean said, helping your child achieve home ownership “is rarely a bad idea.”
“If a gift stood in the way [of my kids] buying a home, I would do it,” Jean shared. “I would rather give them some money now than give them a whole lot of money when I die.”
