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!
Disclosure: Information presented is for educational purposes only and is not an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. To submit a question to be answered in this column, please send it via email to Question@GoFarWithKovar.com, or via USPS to Taylor Kovar, 415 S 1st St, Suite 300, Lufkin, TX 75901.