Financial help for child to buy a house

[RunningBum]

My son is considering his first home purchase, and I'd like to help him if he does. He has enough saved up for a 5-10% down payment, and he probably could qualify for a mortgage for a pretty cheap home in his area, but neither of us want him to get a dump or live in a bad area. I'd rather he get into a house he'd be happy with for the longer term.

I know there are pitfalls with giving this kind of help, but I don't want to get into that. I am considering all that, and have people who know the situation to bounce this off of. I'm not going to get into all the details here and without that information the advice isn't likely to be useful. So, please, don't derail my question and go down that path. Let's just assume that I'm going to help.

I see two options here:

1) Co-sign a mortgage with him. I would probably do something like match his down payment and loan payments. There's some question of how much I can help on the mortgage qualification since I'm retired, but between my assets and ~$48,000 income on my last few 1040s it'd probably be enough.

2) Gift him enough of a down payment to reduce the mortgage he can qualify for. This would almost certainly be more than the $15,000 you can do without paper work. It would eat into the estate exemption, but my estate is unlikely to come anywhere near the $11M limit.

Some of the factors:

I'd rather not outlay too much cash, so putting me on the mortgage (#1) helps.

If, God forbid, he should die before me, buying the house together as JTWROS, the house would go to me. I like that a lot better than gifting him a large chunk, then seeing it go to my ex- or his half sisters. Obviously he could give me the house in his will (I don't think he has a will yet), but there's a simplicity in JTWROS.

I'm not sure what kind of help Virginia gives for first-time home buyers, and whether that is impacted by me (a current home owner) being on the mortgage and deed.

If/when he ever sells that house, he would have a $250K exemption on the gain. I would not for my half. That's a pretty big advantage for #2.

Are there other options available, and any other factors that would sway me to one or the other?

Again, let's please not get into the question of whether I should be helping this much.

 

[travelover]

Faced with a similar decision, we went with the cash gift. That put a clear line on potential total outlays or obligations. No way would I want to be a cosigner for any debt, as things can go terribly wrong even with the best intentions.

 

[Gumby]

I would choose the cash gift option. Owning the house with him as JTWROS opens you up to legal claims if someone is injured on the property.

 

[RunningBum]

Boom. Right off the bat, two really good points I hadn't really considered.

 

[Sue J]

Look into #2, gifting him the amount you want to give and doing the paperwork for the estate tax exemption. I've never done that but I understand it is not difficult to do.

 

[Mr._Graybeard]

Yes, gift enough to get them out of PMI at least. These days amid the economic uncertainty it's always possible he may need more short-term help down the road, but the mortgage should be his obligation.

The father of a good friend actually wrote the mortgages on their children's homes and collected monthly payments. I'm not sure I'd want to go there.

 

[Golden sunsets]

I would gift only. Not knowing the dollars, if you gave him enough additional to meet a 20% downpayment, he could avoid the costly mortgage insurance that goes away once you meet the 20% threshold. Doing this would have the added benefit of reducing his debt/income ratio so that he is less "stretchded".

 

[aja8888]

Faced with a similar decision, we went with the cash gift. That put a clear line on potential total outlays or obligations. No way would I want to be a cosigner for any debt, as things can go terribly wrong even with the best intentions.

We did the same with DD 8 years ago and she was single then. Now she is married to a great guy and they are a happy, responsible couple.

 

[RunningBum]

Yes, gift enough to get them out of PMI at least. These days amid the economic uncertainty it's always possible he may need more short-term help down the road, but the mortgage should be his obligation.

The father of a good friend actually wrote the mortgages on their children's homes and collected monthly payments. I'm not sure I'd want to go there.

Yeah, I don't want to go there either, especially with rates so low right now. Plus it would drain my near term cash, which I don't want to do.

 

[MissMolly]

You might want to look into what Virginia Housing (used to be VHDA) has to offer. All states have as state housing authority. Their loans are geared toward low-to-moderate income, first time home buyers. It might be a place to start.
https://www.vhda.com/Pages/Home.aspx

 

[capjak]

We gave a cash gift for a house purchase.

 

[nhcycling]

Cash gift. It’s what I’m going to do very soon for DD1. Why would I want joint ownership? It’s their life, let them live it.

 

[Souschef]

I just did that for my younger son. As of right now, he would have a nice inheritance. BUT, he needed the money now, now when I die. I met with him for lunch and told him what I would do for him.
He totally broke down and had to leave for a bit to collect himself. I was moved by his reaction. He has never asked for anything from me, and likes to do things on his own, but this was too big a nut to handle. After sending him the money, I adjusted the various TOD accounts I had for him and his brother to reflect the withdrawal.
I did a wire transfer of the money to his account, and asked him to let me know when it arrived. I got a cute e-mail from him;"The Eagle has Landed" letting me know he received the funds.
My late mom used to say it was better to give while you are alive to see the gratitude.
I know I will have to file a Form 709, but it is not a big deal.

 

[pb4uski]

One option to consider is an 80/10/10 loan aka piggyback loan. The bank/mortgage company loans 80%, your son makes a 10% down payment and another lender provides 10% in the form of a second mortgage. Since the bank is only providing 80% your son avoids PMI.

You're not involved other than perhaps gifting him money to help with his 10% down payment. Then you can gift him annually for the payments on the second mortgage so it has no cost to him.... you could even gift him more than the payments and he could use the excess to make additional principal payments on the second mortgage.

It is a way of avoiding the filing requirements since you won't be gifting him more than the annual limit.

A “piggyback loan” — also known as an 80/10/10 loan — lets you buy a house using two mortgages at the same time.

The first mortgage typically covers 80% of the home price, and the second mortgage covers 10%. The remaining 10% is covered by your down payment.

Why use an 80/10/10 loan? Because it can help you avoid private mortgage insurance (PMI), pay lower rates, or avoid getting a jumbo loan.

In short, a piggyback mortgage gives you the benefits of a big down payment without having to save for one.

 

[Souschef]

It is a way of avoiding the filing requirements since you won't be gifting him more than the annual limit.

Since the exemption is over $11M, it is not a problem. The form is a little complex, but there are on line tutorials.
The issue for me is the 2020 form is not out yet, but I have until April 2021 to file it.

 

[HI Bill]

Gift part of the downpayment. Having a financial relationship with relatives doesn't usually end well. It's a gift, and you're done with any obligation or connection to the property! I'm sure it will be well-received!

 

[pb4uski]

Since the exemption is over $11M, it is not a problem. The form is a little complex, but there are on line tutorials.
The issue for me is the 2020 form is not out yet, but I have until April 2021 to file it.

I never claimed that it was a problem did I? I just said that it was a way to avoid the filing requirements, nothing more, nothing less.

Just another option available to the OP.

 

[RunningBum]

I appreciate knowing of other options that I hadn't considered.

As I said in post #1, he is just considering it right now, but I'm an over planner so I wanted to have some thought put in as to how I'd provide aid, if needed.

I appreciate all the on-target input and perspectives.