Insurance

Using a Home Equity Loan to Help Your Kids Buy Their First Home 2024

The American desire for homeownership is quickly slipping out of reach for many, with 22% of millennials surveyed by rental listings website Home List saying they expect to rent forever. For those hoping to buy a home, nearly two-thirds reported having no money for a deposit.

If you’re looking for ways to help your children buy their first home, leveraging the equity in your home through home equity financing may be a way to do so.

Use a home equity loan to help children buy a home

Before you take out home financing to help your children get their first home, think about the rest of the property you may have offered. If you have other assets such as financial investment buildings, cash savings, or retirement accounts, sit down with an economic planner to find out what would be most effective to utilize for this purpose.

You may find that selling an investment home or enabling your children to live there for reduced rent or no rent at all may be a much better alternative than taking out a car loan to buy a home, especially in economic conditions and with high interest rates. Home equity financing requires at least 10% equity in your home, good credit, and also proof of sufficient income to repay the financing.

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When you’re approved for a loan, the cash is yours to do with as you please. Remember that you will be making fixed monthly payments, including focusing on the amount borrowed for the duration of the financing. If you’re ten years away from retirement, make sure you can still make financing payments after your retirement, or take out a home car loan with a much shorter financing period.

Cash for down payment

Giving your children cash as a down payment may be the easiest way to help them buy a home, but it may not be enough. The gift tax liability limits your funds after an initial $16,000 per recipient per year in 2024 plus $17,000 for 2024.

If you and your spouse give $17,000 to your child in 2024 for a total of $34,000, that could provide them with a 20% down payment on a home up to $170,000. This may seem like enough, but in 2024, the average residency rate nationwide was $428,700.

If your kids invest just 3.5% through FHA financing, they could potentially buy a home worth about $971,000 with a $34,000 deposit.

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However, FHA financing brings additional costs, most importantly the large upfront and annual home loan insurance premiums that remain for the life of the lending. In warm real estate markets, some home sellers are reluctant to accept FHA offers if a non-FHA deal is readily available, since FHA loans have stringent appraisal as well as appraisal needs.

Help in paying off debts

One of the factors preventing your children from purchasing a home is the debt-to-income (DTI) ratio. Student finance debt reached a record high of $1.745 trillion in 2024. If your children have large student finance payments, it may be difficult for them to get permission for a mortgage. Many lenders prefer a DTI of 36% or much lower, which may be difficult for current graduates to achieve with current college costs and entry-level wages.

If you help your young children pay off their practice loans with home equity financing proceeds, you can help them get licensed for a mortgage. However, keep in mind that current tax rules may still apply.

What are the risks of a home equity loan?

There are two primary risks with a home car loan:

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  • You may default on your financing and lose your home if you cannot pay it
  • You can lose your loans if the value of your home declines, leaving you unable to sell your home without a significant financial loss.

Can I co-sign my child’s mortgage?

Yes, you can co-sign your adult child’s home loan, which may help them get approved for a car loan if their earnings or credit report are insufficient or if they have significant financial debt. Keep in mind that you are on the hook for the mortgage if something happens and your child becomes unable to pay it. Co-signing will also affect your debt-to-income (DTI) ratio, which could affect your future ability to be approved for points like a mortgage or car financing.

Who pays gift taxes?

Generally, the provider pays the gift tax liability to the Internal Revenue Service (IRS), but there are some conditions under which the recipient can make arrangements to pay the gift tax. Contact a tax compliance professional to find out what is possible and also best for your situation.

Bottom line

If you want to take on more debt to help your young children own a home, taking out home equity financing may be a way to do that. You can leverage the proceeds of your home equity financing any way you want, but helping them with a deposit or helping them pay off financial obligations that may affect their mortgage approval is one of the most effective ways to help them get their first home.

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