Your child is ready to buy a home. Congratulations! The likelihood of anyone moving back into the basement or taking over your newly-outfitted craft room has effectively shrunk to zero. It’s an exciting time for both of you.
Buying a home today is lot more challenging than it was thirty years ago, and, naturally, you’d like to give your progeny a hand. Whether that means good advice, the strength of your credit rating, or a financial gift or loan, we’re here to help you help them. Here are our top tips for helping your child buy a home.
The most straightforward (and maybe the most important) way to smooth the road toward home ownership is with good advice, sound financial education, and knowledge gained from your own past experience. You may be able to help your child find a good realtor, compare different mortgage providers, and understand the costs associated with owning and maintaining a home.
At the same time, it’s important to understand the ways in which the home buying process has changed, especially if it’s been a few years since you were in the market for a new home.
If your child qualifies for a mortgage based on their income level, but doesn’t have an established credit history or a high net worth, stepping in as a co-borrower could make a lender more willing to provide a mortgage loan to your child. While co-borrowing doesn’t involve any immediate output of funds on your part, a co-borrower is equally responsible (or liable) for the debt; choosing to support your child in this way could affect your ability to qualify for loans in the future, since you will have to declare the mortgage debt as if it were your own.
A financial gift
Giving your child money toward their down payment is a simple way to support them financially in their home buying adventure. You will need to sign a “gift letter” clearly stating that the money is a gift and is not repayable to you. The mortgage provider will also probably require proof of the transfer of funds from you to your child, or proof that you have the funds to gift (either a bank statement, or your financial institution’s stamp on the gift letter to confirm that the money is in your account).
CHIP mortgages are one way to access equity in your home to then give to your child to purchase a home. CHIP mortgages are similar to Home Equity Lines of Credit; though the fees and rates on a CHIP mortgage are higher than on a HELOC, there is no income-based qualifying process for a CHIP mortgage, and there are no minimum monthly payments.
Parents can also lend their child the funds for a down payment on a home. Before going this route, check with the mortgage provider—while borrowed down payments are accepted at ATB, this isn’t the case at every financial institution. In the case of a borrowed down payment, your child will need to be able to demonstrate that they can service all their debts, including the new mortgage and the loan from you.
Before you offer to give or loan money, make sure you're on track for retirement. Don't put your own financial security at risk—in the long run, it won’t benefit you or your child.
Regardless of how you decide to lend a hand, consider sharing the ATB Home Buying Guide with your child. It’s full of up-to-date, Alberta-specific advice, tools and information on the home buying process, as well as tips and tricks any homeowner will find useful.