Taylor Says

by Taylor Kovar

Should I lend my son money for his house?

Hey Taylor -

My son has been with a great company for 10 years and was recently relocated. He has been renting for the past 10 years but now wants to invest in a house since he is settling down and interest rates are low. He doesn't have a lot of money saved up to use as a down payment, so I'm thinking about giving or lending him the money. What do you think? — Susan

Hey Susan -

Coming up with a down payment is often the greatest barrier to overcome for first-time home buyers. As a general principal, I think borrowing money from friends and family should be done very cautiously. All loans should involve a legal contract, and mixing finances with personal relationships can definitely make the holidays awkward if not done properly. Plus, having this additional loan could negatively influence your son's debt-to-income ratio, which will be used to calculate how much he can borrow toward a house.

You can definitely gift him money toward a down payment, but only do so if you consider it a no-strings-attached gift. The lender for his loan may actually require you to sign a letter affirming that it is truly a gift and will not need to be repaid. 

In some cases, his required down payment could be as low as 3.5% for an FHA loan, but if he can come up with a 20% down payment, he can save on closing costs, interest rates and bypass needing mortgage insurance, which could save him hundreds of dollars a month. 

There are many down payment assistance programs out there at the federal, state, and local levels that he will want to consider. These incentivize settling down in certain areas; provide loans and grants to law enforcement officers, teachers, firefighters, etc.; or help purchase and renovate foreclosed properties. 

If he has enough money in an IRA and this is his first house purchase, he could potentially withdraw up to $10,000 penalty free to use on the down payment. He will have to pay income tax on this money and there are still a few requirements he has to meet, but this can be a great option if he is short on funds. 

This final option should only be used after he speaks with a financial professional about the details of his situation, but if he is still short on cast, he might see if taking a loan against his 401(k) is an option. This is rarely a good choice, but it can make sense for some people who are just a little short of the money for a full down payment. 

Purchasing a home is a big decision, so I highly recommend your son sit down with a financial professional before making a final decision, as they can show him this decision will affect his future. Good luck and happy house hunting!

Taylor J Kovar
CEO | Kovar Wealth Management
Phone: (936) 899-5629
Firm: KovarWealth.com
Blog: GoFarWithKovar.com