By Jennifer Frost
Council of mortgage lenders statistics show that 52% of first time home buyers get help from family members. With the majority of them being in their 20s and 30s, huge student loan debts, high property prices, and poor credit rating make it hard for them to afford to buy a house on their own. This means that most American family members especially retirees feel it’s their duty to support younger family members to enable them to own a home.
Though helping out is good, retirees should ensure they maintain a healthy cash management and planning routine by avoiding putting their retirement comfort at risk by spending up all their pension. Depending on a retirees financial situation and relation to the family member, the following strategies can be used to help relatives get their first home.
Gifting Cash For Purchase
Gifting cash is the best and simplest way a retiree can help a family member get a house. Financially stable retirees can gift cash enough to fully purchase a house. This is however liable to gift tax of 30% for gifts exceeding 15,000 and 30,000 dollars in a year for individuals and couples respectively. To avoid taxation, retirees can gift the amount as savings yearly till purchase price is met.
Retirees can also offer cash gift as a deposit for a house which is usually 20% of the total house value. This helps family members able to make monthly installments but unable to raise the initial deposit amount. Paying deposits also helps them avoid private mortgage insurance charges in addition to helping them get lower interest payment rates. Low interest means more future saving to the homeowner.
Buying Property And Renting It Out
Cash gifts for property attract taxes which is many people avoid. To circumvent, retirees can buy a property and rent it out to their family member under a family let arrangement. This provides an alternative to the family owning it immediately. A retiree rents the house to them at a favorable price. The retiree may decide to gift or sell it to them in the future. The strategy ensures that a retiree has a steady income stream to supplement their pension.
Lending Out Money For Purchase
Conservatives may feel that gifting out cash outrightly promotes irresponsibility. Retirees can, therefore, give loans to family members that will enable them to get their dream home. Even if it is intended to be forgiven in the future, the retiree needs to charge interest on the loan. This is to avoid getting into trouble with the IRS in case auditing is done. The interest, however, should be lower than bank mortgage interest charges and higher than the amount it can gain in a savings account. Making regular repayments will help inculcate the spirit of financial discipline to family members being helped.
Providing Guarantees
Low wage growth and skyrocketing home prices have made it impossible for young adults to qualify for mortgages. Being named as a guarantor as a retiree allows young family members easier access to mortgages. One can guarantee loan payments. Here, if the dependent is unable to make monthly payments, the guarantor will have to make payments on their behalf. As a guarantor, it’s important to set limits by not covering for any additional borrowing done by the dependent.
Retirees can also provide a guarantee by offsetting the value of their saving against a mortgage. Under this method, retirees don’t need to give their money away. Their savings are fixed for an agreed period till the dependent pays about 30% of the mortgage.
Being a first time home buyer in this tough economic times is very hard. It is therefore natural for family members including retirees to want to help out. Helping a family member get home is usually rewarding emotionally. In addition, it can be financially rewarding to the retiree too. One gets tax benefits, rental income and possible profit from the sale of the property. Whatever strategy you use to help a family member, make sure you seek professional advice in order to ensure all parties get the most benefit.
