How Can We Tap the Bank of Mom and Dad to Buy a Home?
Family dynamics may impact your ability to borrow from your parents
Young couples hoping to expedite the process of saving for a down payment on a new home often look to their parents for the money, providing they can get up the nerve to ask them.
Even first-time homebuyers with a down payment in hand sometimes are unprepared for other expenses when they arise. For example, lenders might attach conditions to mortgage approval that could require paying off another debt, such as a credit card or a car loan, or addressing another problem that arose when running a credit check.
Getting financial help from parents when buying a home can be a quick solution, but convincing them to help is rarely easy. Every family is different and features its own dynamics. It would be easy to say that all parents with the means would like to help their children buy a home, but that's not always the case. It takes a bit of effort to convince your parents to give you money.
A Withdrawal From the Bank of Mom & Dad
Before asking parents for money, there are some basic questions to ask yourself first. First, do you have reason to believe your parents have the money to give? Parents don't always share the details of their finances with their children—even their adult children. If your parents appear as if they are struggling to make ends meet, asking them to assist with a down payment is most likely to make them feel bad because they have no option but to say no. Use common sense with this one.
Second, do you and your spouse or partner plan on asking both sets of parents? Is one set of parents more financially comfortable than the other? If only one set of parents can afford to help and then does, will the other set of parents feel uncomfortable? Maybe both sets of parents can afford to help, but they don't agree on whether or not it is appropriate. Be prepared for the impact this transaction can have on relationships.
Family peace is important to consider because borrowing money can impact how your in-laws and other family members get along.
Third, are you asking for a gift, or are you planning on paying back the money? The lender will consider money from a relative to be a gift, but this question is about how you plan to handle the transaction with your parents. If they'll expect to be paid back, be realistic about what you can afford to borrow and how quickly you can afford to repay it. If you choose to pay back the gift, you can arrange to do so out of the proceeds should you sell the home down the road.
Finally, why should they help you? Most parents will want to help, but many also want their children to earn their independence and work for such major purchases. Think about your own personal situation, your parents' personal situation, and why it would be in their interest to help you. They're going to ask, so be prepared with n answer.
Reasons for Parents to Help
Some parents really want their children to own a home. Parents who are homeowners themselves are even more likely to want to see their children become homeowners. Consider some other reasons parents will want to help:
- They feel empowered when children ask for help—whether it is in the form of money or anything else. Parents derive personal satisfaction from knowing they still can make a difference in their adult children's lives. Parents love you, and if they can be a part of your success, then they are successful too.
- Parents looking forward to having grandchildren may believe it is easier to raise children in a home rather than an apartment. After all, homeownership is the American dream, and parents want to see their grandchildren live in a family neighborhood.
- Parents want to lead children to their next level of success and not wait for a will to be divided. Your parents may know how hard it was for them to buy their first home, and they want to make it easier on you.
- There are tax benefits. Tax laws allow parents to give cash gifts to their children up to certain amounts without paying a gift tax. Consult a tax accountant to fully take advantage of this.
When It Is Time to Ask
Once you've decided to ask your parents for help and understand why it could be in their best interest, consider some tips for how best to go about it.
- Ask your parents for money in person; don't do it over the phone. This isn't always possible if parents live a long way away, but the gist of this advice is to not be flippant about the request. If the meeting can't be in person, arrange a time to talk over a video conferencing app.
- Be prequalified by a lender. Be ready to show your parents that you are not all talk but you are action. You have taken the steps to get a loan preapproval letter from a lender. If the lender has faith in your ability, your parents are more likely to have faith as well.
- Show your parents you have hired an agent. With a buyer's agent on your side, your parents will see you are serious and prepared. Give your parents the agent's card.
- Ask your parents to look at homes with you. Your parents can help you to make the right decision. They might even have great suggestions for you based on their own experiences, and they'll feel like they are needed for more than just their money.
- Explain your financial needs. As a couple, you might earn a high income, but pressing demands might make it difficult to save. If interest rates are favorable and prices attractive, now might be the time to buy.