The Parent’s Dilemma: Helping Kids Buy a House

We just published an article about how wealthy folks over age 50 are. Nearly $100 trillion in assets and with a “T”. Meanwhile, many of these parents and grandparents are seeing their children and grandchildren navigate a world where the next generations are struggling to acquire a house. The elders want to help but don’t want to be stupid in case the relationship doesn’t work out. So, what are the options here?

The typical problem is the down payment. The average U.S. home price today is a staggering $500,000 according to the St. Louis Federal Reserve. Home prices have risen more than 30% since the pandemic started almost 5 years ago. How can that be? This is, at best, an intelligent guess, but it appears that a lot of investors who historically were in stocks, bonds and private equity have decided they like residential real estate. No less than Warren Buffet is quoted as saying if he were a young man he would probably buy a “couple hundred thousand houses” for his portfolio. Warren Buffett Said He’d Buy A ‘Couple Hundred Thousand’ Single Family Homes If He Could – And He’d Take Out Mortgages To Do It

Starting point: Buffet is worth $145 billion. The rest of us must be a bit more careful. And part of that is not succumbing to irrational exuberance over helping the kids or grandkids acquire a house that might decline in value, or the buyers can’t really afford. Rule No. 1 is to make certain any money you gift or loan makes for a sustainable home purchase.

So, here are the initial questions. Is your beloved family member buying alone or will the home be jointly held with a spouse or significant other? That’s a matter of who owns title. Then there is the closely related question of who signs the promissory note to pay the mortgage. If you are helping to finance this transaction, it might be wise to speak to your own lawyer about how it can go right or wrong.

Couples don’t need to be married to buy a home together. If they do so without marriage they are probably “partners” kind of like Scrooge and Jacob Marley. You have the opportunity in that kind of transaction to be a lender or a partner but that is going to affect how any commercial  lender (bank or broker) looks at the deal. The typical mortgage lender won’t lend to your kid/grandkid & partner if you want your contribution to be a loan. A “partner” is another matter since that means you are on the title and you also liable for the lender’s mortgage. This is the reason why your kid may be asking you to sign a document stating that your contribution to the closing (the down money) is a gift. Many parents and grandparents before you got your call have signed the “gift letter” (i.e., your $25,000 “contribution” to the cause is a gift). Then, when the relationship went badly and the house mortgage was in default, these same parents tried to say they made a loan and not a gift. That shift in legal position is going to turn ugly and make you look foolish at best, duplicitous at worst. You cannot have a foot in both camps (lender/donor) in any practical way.

Now, let’s look at the married couple. You want to help. The problem in terms of lend versus gift is the same. And, again, almost every commercial lender (banks, mortgage companies) insists that money you will contribute to a closing must be a gift for which you have no recourse if things go wrong. So, it’s a $500,000 purchase and the down money is 10% or $50,000. If you put up half of that, the mortgage lender is going to insist it’s a gift. And if the property is jointly titled or even if your offspring takes title in his/her name during marriage, the property is marital and subject to division in divorce. You can have an agreement saying the property will not be marital no matter how it is titled, but that’s a confusing document in its own right because “marital property” includes any property acquired during marriage no matter how titled.

In a sense, unless you take the position of being a partner, the only practical solution is to insist on an agreement between the spouses concerning third party infusions of cash to purchase of marital property. That agreement would say that the spouses agree that any contribution by a non spouse to the parties during the marriage shall be treated as a gift to the individual family member and treated as a separate gift if there is a separation or divorce. In a word, it shall be treated as separate property of the spouse who received the gift and restored to that person (the done) when the jointly held property is sold or divided in a divorce.

Smart readers will pick up on a similar issue. You put up $25,000 for what will be $50,000 of home equity as the new homeowners leave the settlement. The happy result is that the new home appreciates by $100,000 during the marriage, $75,000 because of market appreciation and $25,000 because of the paydown of the mortgage. The parents/grandparents might easily argue that of that $75,000 in market value increase, their “gift” accounts for half. They would contend that the “gift” of $25,000 caused $37,500 in increased value and should produce a $62,500 set aside as “gifted.” The argument has merit but is not going to be a “gimme” in equitable distribution. An agreement can be drafted to clarify this matter, but it needs a well defined formula and it needs to be formalized (i.e., signed) before money crosses the table at a real estate settlement. That agreement is between the married couple but as parents or grandparents you have the power to hold back the cash that makes the transaction work unless the right agreement is in place.

Unless you insist on a written agreement evidencing an understanding that your contribution to an investment like a house comes back to your child/grandchild if their relationship sours, your contribution to the closing will be deemed a gift to the couple and part of the home equity to be divided in a divorce.