How do I help my daughter or son buy their first home?
As the GoldCoast team grows older, we do so together with our clients, many of our prior first-time homebuyers are now parents, and (some are) grandparents.
We all experience hardship, victories, losses, growth, recessions, and economic boons.
The accumulated intellectual property through these emotionally charged peaks and troughs contains significant value – but transferring the words of wisdom – especially to people we love and care about – isn’t always well received.
(Almost) instinctively we know that buying a home is a good investment for our children. We’ve seen it play out with co-workers, friends and neighbors:
- The capital gains exemption on a primary home may have been a game changer for your older cousin, the equivalent revenue of working a 2nd job …. for 18 years.
- Sweat equity – a spray bottle and putty knife removing wallpaper illuminated by a droplight – was a way to provide “at-home entertainment” and bond with a spouse.
- Kiplinger Finance reports that homeowners enjoy a 4,300 percent higher personal net worth over their residency counterparts who alternatively elect to support their landlord’s mission (AKA renters).
So why don’t the current 20-30 year olds absorb this intel and our stories and opt to trade in their entertainment points on their VISA card for a personal down payment savings campaign?
I’ll explain (later when we speak) but you may not want/like to hear it.
If you truly want to help – and I introduce here the stark difference between enabling and helping – then you must be strategic, deliberate, and overly communicative.
This means that you can’t do the hard parts for the people you love the most in life.
- The hard part is the financial burden.
- They are the sweat of deadlines; learning how to deal with circumstances outside of one’s control.
- The act of preplanning for the accumulation of a downpayment.
- Financial sacrifices are required for savings.
- Problem-solving future competition to honoring a monthly mortgage commitment.
The worst thing that you can do is “buy” a house for your offspring.
At the first hint of pressure in any type (relationship, health, financial, employment, addiction) unearned assets are the first to be leveraged, sold, disrespected, “given back”, split up, seized, or liened, etc.
There are 296 million search results of the dangers of winning unearned money. While buying a house for your child (with some expectation of repayment) isn’t nearly the same as winning the lottery, the effects – that it could strip the desire to strive to purchase a home for themselves on their own – are indeed possible.
So where to begin?
The first part is the “Why” behind the quest for ownership.
Do you want your daughter to own the house? – or does she want to own it?
Motivation for ownership is the driving force for success and contains the key integral to it.
Extensively we’ve studied the motivations leading up to a home purchase and recognize that the child must be willing to make the sacrifices needed: if they aren’t or don’t – you’ll need to reassess this mission.
If your child is leading the charge on this but has tapped you, their parent, in to help let’s examine where and why you could productively help.
- They want your expertise and counsel.
- Debt to Income ratios aren’t enough for your child to qualify on their own.
- They are lacking financial resources like downpayment or Closing Costs.
- Their credit doesn’t reach the minimum hurdle for a mortgage application.
[Please note, none of these reasons are valid to jumping directly into the Co-Signor role. When a parent acts as a co-signor they are effectively partnering on the purchase with their children (and their children’s potential future spouse). Some parents enjoy this level of control over their children, however it isn’t wise nor is it healthy. When GoldCoast is approached for assistance in engineering a home purchase for an adult child (our most common mortgage application category in recent months) we exhaust all avenues for the child to do a stand-alone purchase and avoid a co-signor situation whenever possible]
Let’s break it down together.
Expertise and Counsel
What an honorable role to be tagged in on; a wonderful type of partnership between you and your child.
Your knowledge is what’s needed, not your wallet.
Enjoy the journey. We’re here to help if the level of required knowledge exceeds your pay grade.
Debt to Income Ratio
By the time your child learns the phrase Debt-to-Income, it means they have already attempted a pre-approval and failed, or they are bidding on a live transaction before they really should have been.
Several times a year, I’ll receive a frantic call from a homebuyer under contract with news of failed financing. Sorry – but that poor planning cannot command precedence over the clients we have been planning with for months.
If that’s the circumstance you’ve encountered, fill your lungs and explain it’s time to cut the line and start over. We’ll gladly join you in rebuilding the deal structure but we won’t take the fishing rod with a live catch on the line and bail your son out – and neither should you.
Alternatively, if your child’s prequalification or pre-approval isn’t successful that is the optimum time to introduce them to our team. We can offer a 2nd opinion. Or we can back up to the beginning and begin from scratch.
Debt-to-income is a ratio. Numerator and Denominator. Each component of the ratios has feeds going into it. Unexpected changes to the ratio mean the feeds have changed: a mistake has been made (income was calculated in error), new information has surfaced (property is located in a flood zone or an undisclosed side hustle is taking a financial loss on tax returns) or new debt has been introduced.
Some of these issues are workable – and if not we can make a game plan to build the strength of the ratio given planning time to maneuver.
Downpayment and Closing Costs are the most predictable numbers in the home-buying process. A downpayment is a strict percentage of a purchase price. Loan Costs and Closing Costs are static fees. Taxes and other costs are based on calculatable percentages.
Long story short: the needs of financial resources are very predictable. You can plan for all the costs. You can build a system to fortify and build the accounts and balances.
Can these balances be built in a year? Two years? Or is it going to take a decade?
Can we shave off 8 years’ worth of savings contributions by looking at PMI for help? PMI provides an entry pass into homeownership with as little as a 1% downpayment as an alternative to waiting to accumulate a 20% downpayment on the home purchase price.
Before you open your checkbook to fund a downpayment – let’s examine what the course looks like with your child adhering to a strict saving campaign. The additional benefit of a strict savings campaign for your child is that it’s a great practice game for conforming to a future legally binding monthly mortgage commitment.
If there is a parental contribution needed to bridge a gap in financial resources, then we should look strategically at the amount of the gift, not making it more excessive than it needs to be, and the benefit of annual IRS gift allowances.
Let our team help you set the deal architecture and necessary savings campaign.
Maybe one of the most common topics to introduce the co-signor discussion is the one related to credit.
Speaking straight up – lower credit scores cannot be overcome by adding borrowers to an application.
Underwriting guidelines always use the lowest credit score among all of the applicants as the “Decision FICO Score.”
If one borrower has 565 FICO and you ask a parental co-signor with an 822 FICO along for the journey, the pricing, the interest rate, and the risk will all be assessed to the 565 borrowers. A lower FICO can’t be unseen.
Metaphorically speaking, if the boat has a hole below the waterline, adding another motor to the boat won’t solve the problem.
So what to do on this common topic?
First address the problem, not the symptoms.
A FICO score is a risk prediction tool. What is within the field of vision at the moment of the score calculation is what the score is based upon.
So while some will argue you need a “way back time machine” to make positive adjustments to a FICO score, we will argue that the score is completely in the control of an applicant.
By rearranging the attributes on the table for score calculation the score can be improved IF you know where to adjust.
NEVER co-sign for credit. ALWAYS refer the applicant to GoldCoast for guidance related to building a game plan to improve credit.
Many of the home purchase projects we work on at GoldCoast are Multi-Generational in some way. Helping a child achieve their goal of homeownership is a worthwhile and fulfilling role for the future financial and personal security of your children.
The most successful deals always start with planning. Like a year out if possible.
We’ve seen the trainwrecks too. It’s usually caused by the tail wagging the dog (a “great opportunity” hijacks everything) and contrary, very seldom are there failures after a well-structured planning session.
There are few, if any, deal architects that will help with the level of empathy and understanding that our team disseminates daily.
We’re here to help you. Free of charge. And at no point are you ever obligated to enlist our services. We know we’re not the correct match for everyone – and in those cases, we’re more than pleased to introduce you to someone who could serve your needs better than we can.
[Children currently renting can begin their homeownership journey anonymously by visiting our resourceful Tenants Lounge.]