It’s becoming increasingly common to consider buying a home with your parents.
Among homebuyers aged 22 to 30, 23% received their down payment as a gift from a relative or friend, while 17% of homebuyers aged 31 to 40 did, according to 2021 Homebuyers and Sellers Generational Report, a survey by the National Association of Realtors Research Group.
Those figures are much higher than the overall 10% of homebuyers who received gifts, and a huge jump from the 3% of homebuyers aged 56 to 65 who did.
The trend of parental financial help is happening because younger people’s ability to save for a down payment is often constrained by several factors, including increasing levels of student loan debt, high rents that affect the ability to save for a home, and their income not keeping pace with inflation.
Here’s what to know about buying a home with your parents’ help.
What's in this Article?
An idea tailor-made for this point in time
It’s not just younger people’s economic situation driving the increase in adult children buying homes with the help of their parents. Real estate market conditions are forcing their hands as well. Home prices have risen steeply in many areas of the U.S.
In 2020, the average price of a new home was $391,900, according to the U.S. Census Bureau — and that’s a rise of $119,000 in just a decade.
Climbing prices over the last year have led to bidding wars, which not only drive up prices, but can make it more difficult for first-time homebuyers to compete unless they can make cash offers.
Overall economic conditions add to the stress. Interest rates on mortgage loans have been at historically low levels for some time, but are expected to rise in the new year.
Interest rates affect your monthly payment and the overall cost of your loan, so parents may want to help to make sure you don’t miss out on the current low rates.
Given the economic climate, adult children may struggle to afford the down payment on a home or to compete with other buyers. That’s where their parents may be willing to step in to help them buy the home.
Building equity in a home is one of the chief routes to asset-building in the U.S., and constitutes roughly a third or more of the total wealth of homeowners. Indeed, homeownership has proven vital to wealth creation and to establishing generational wealth.
Knowing this, the idea of accepting help from your parents or partnering with them to buy a home may seem increasingly prudent.
The question is: is mixing finances with your parents a good idea? Let’s look at the potential ways parents can help, and then at potential challenges to watch out for.
Options for buying a home with help from your parents
Parental help can come in several forms. Here are a handful of ways to buy a home with help from your parents.
A co-signer is financially responsible for repaying the loan if the primary borrower defaults. Lenders may be willing to grant you a loan with a co-signer if you don’t qualify on your own income, credit score, or other metrics. Your lender may also be able to give you a more competitive interest rate if a parent co-signs.
Co-signers usually don’t have any ownership interest in the home. However, they must meet the loan program’s guidelines, including having a qualifying credit score and debt-to-income ratio (DTI)*.
A co-borrower is a primary borrower alongside you, which means they are also listed on the loan and technically co-own the home with you, even if they don’t live there. Co-borrowers also lessen potential risk to the lender, since they share responsibility for paying the loan.
If you apply for a loan with a co-borrower, your lender will assess both of your credit scores, income sources, assets, debts, and employment status.
Many loan types, both conventional and government-backed, allow homebuyers to use gift funds toward their down payments and closing costs.
If your parents plan to contribute to your upfront home purchase costs, they will need to provide a signed gift letter stating that the money is a gift, rather than a loan that must be repaid. Your lender will also need to see transaction records of the money being transferred from their bank account to yours. The gifts cannot be made in hard cash; they must be documented through bank transfers and records.
As of 2022, parents can give cash gifts to a child of up to $16,000 every year (for any reason) without triggering gift taxes from the Internal Revenue Service (IRS). Over your parents’ lifetime, they can gift $11.7 million without a gift tax.
If your parents plan to relocate or downsize and they want to give you their current home, there are several ways they can do this:
- Transferring ownership: They can contact the lender, put your name on the title, and file a quitclaim deed, which transfers ownership and title to you
- Selling the home to you: They can sell the home to you, either at the appraised value or below. If they sell it below appraised value, this is considered a gift of equity, as you immediately benefit from having equity in the home. The lender is likely to require a Gift of Equity letter in this instance. The gift of equity will also have tax implications for your parents
- Creating a Qualified Personal Residence Trust (QPRT): A QPRT transfers ownership to a trust. It allows your parents to live in the house for a certain period of time. At the end of that time, you can move in. If the home price has appreciated during the time you parents live in it, your parents may save money on gift taxes
Perhaps your parents want to move but still have a mortgage on their house. Your lender may allow you to assume the mortgage, or take over the loan balance and payments.
If the home price has appreciated, the existing mortgage can be well below what you would pay were you to purchase the home at its current market value.
If you don’t want to live in your family home, but your parents want to move, they can sell the property and give you a portion of the proceeds to buy your home. This might be an option if, for example, they are retiring and plan to travel before purchasing a new home or if they are downsizing and anticipate needing less for the down payment on their next property.
Before accepting parental help to buy a home, both you and your parents need to take time to consider the potential pitfalls. Any intermingling of finances, relationships, and concepts like “home” can become emotional and tense, and you don’t want parental financial help to fray your relationships.
“Financial issues can become complicated in even the most harmonious families, because money itself is complicated,” notes Dr. Nikki Press, a clinical psychologist in New York City. “Money is a currency to get us what we need, but it is also connected to feelings about power, dependence, care, success and failure.”
First, consider whether the situation has any financial risks for you. By accepting their help, are you purchasing a home you can’t really afford?
“While the parents are assisting, the child is usually going to be making the monthly payment,” observes Ashley E. Melton, a Realtor in Charleston, S.C. “The parent will sometimes pick homes that are a stretch financially, not realizing that it’s going to be difficult for the child.”
It’s important to consider what’s comfortable for you on a regular basis, and what your lifestyle goals are.
“Most of my younger clients want to maintain a social life and don’t want to end up ‘house poor,’” Melton says. “That could happen if financial help nets you a mortgage that is more than you can afford on your own. What happens if you find the payments a stretch? Could you parents help you then, and would they?”
Second, candidly discuss any potential risks for your parents. If they are, or will soon be, retired and living on a fixed income, are they willing to be co-signers or co-borrowers who might be on the hook for mortgage payments? Certainly, you hope that won’t be the case. But if you were laid off or became ill and couldn’t work, could they afford those payments without risking their own income and stability?
Consider this, as well: If they gift, sell, or place a home in trust for you, are they fully comfortable with the economic ramifications of that decision? Or were they depending on the proceeds or equity to fund their own retirement? Talk openly about their plans and whether this is a sound financial decision for everyone’s futures.
Setting boundaries is also crucial. If your parents are co-signing, co-borrowing, or giving you a significant amount of money, they may assume they’ll get to weigh in on the type of home you buy.
“It’s important to establish boundaries about what children and parents can decide, how much everyone is investing (which can affect decision-making power), and how long the arrangement is,” says Brian Wind, a clinical psychologist and adjunct professor at Vanderbilt University in Tennessee. “Let parents know when you will ask for their advice and which aspects you appreciate their input in but where the final decision will lie with you. It’s also about having open conversations about each person’s concerns and the reasons for the concerns.”
Emotions or expectations can create friction between parents and children, especially around as big an investment as buying a home. Communicate clearly what you want their role to be in the process.
“Parents should not get too involved in the process or contact agents and lenders directly, unless they are a co-signer,” says Jason Gelios, a Michigan Realtor. “Parents should be a source of information and opinion, but never overrun the process or try to dissuade their child from buying a home because something minute doesn’t appeal to them. What the young adult wants from a home will be different than what the parent wants.”
If your parents help you financially, will they expect to be able to drop in or visit more often — and if so, is that comfortable for you? If they are gifting you their home, do they feel comfortable with moving out on a timeline you set? And will you feel comfortable living in your childhood home?
These are all important questions to ask before you commit to buying a home with your parents. If you expect that partnering up for this purchase will cause tension and resentment, you may opt for a smaller starter home you can afford on your own.
But before you abandon the idea, remember that candid conversation can work wonders.
“Before any money is exchanged, it is a good idea for the family to sit down together and lay out exactly what help is being offered and any conditions that are attached to that offer,” Press says. “Though it can be uncomfortable, it is also a good practice for both parent and child to express any concerns they have about the arrangement so those can be addressed proactively. Finally, each individual should take time to reflect on their emotions about giving and accepting a large sum of money so that they can be intentional, rather than emotionally reactive, as they make decisions.”
Ultimately, Melton says, “a discussion with the parents at the beginning of the home buying process is best, so that everyone is working together for the final goal.”
Buying a home with your parents FAQs
Yes, you can buy a property with your parents. They can be co-signers or co-borrowers on the loan, assuming they qualify for the loan. They can also give you money toward your down payment, make a gift of equity by selling you their home for less than the fair market value, or put the home in your name.
Yes. They can add your name on the title or file a quitclaim deed, which transfers ownership and title to you. If they are still paying on a mortgage, their lender may allow you to assume the loan and take over the payments.
There are several methods of buying your parents’ house. The best way depends on your needs, your finances, the relationship between you and your parents, tax considerations, and more.
You can purchase it from them or assume the mortgage. You could also receive a gift of equity, which means they would sell the house to you at a price beneath the appraised price. The difference between the appraised value and the sale price is the equity you would receive as a gift.
It’s becoming more and more common for parents to help their adult children buy a house, as many would-be homebuyers face financial constraints such as high rents and high levels of student loan debt, as well as rapidly rising home prices.
Buying a house with your parents can be a smart move, as long as you discuss with them all the potential ramifications, both financial and emotional, so that the decision is a positive one for your relationship.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.
*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income