Home values and interest rates remain high, and that’s leading some parents to consider becoming a bank for their kids. If you have the resources to give your adult child a loan to buy a house, it seems like a great idea. But is it? Are there pitfalls? We’ll explore the idea today on Faith and Finance.
Rob discusses the reasons parents might consider lending money to their children for a house purchase, such as reducing the interest the child must pay and helping if the child does not qualify for a mortgage due to debt-to-income ratio issues or insufficient credit history. He emphasizes the importance of understanding the implications of lending versus gifting money, the potential risks involved, and ensuring any loan is legally documented.
Parents may lend to their children to save them from high interest rates or if they're unable to secure a loan due to financial reasons.
Lending money can potentially harm the recipient by discouraging their efforts to earn money and achieve financial independence, and it can risk the lender's financial security and relationship with the child if the loan is not repaid.
The Bible encourages providing for relatives, as seen in 1 Timothy 5:8, which states, "If anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever," but this provision must be balanced with wisdom to ensure it does not encourage dependency.
Gifting rather than lending may avoid relationship strain, but it comes with IRS implications if the gifted amount exceeds annual exclusions, impacting the lifetime gift tax exclusion.
Private loans to children for home purchases won't help build their credit history, potentially affecting future borrowing capabilities, but can save significant amounts in mortgage interest.
If parents decide to lend, the loan should be formalized with a legally binding contract detailing the loan's terms, ensuring compliance with IRS requirements and protecting both parties' interests.
Rob underscores that while personal loans for home purchases can offer significant benefits, especially in saving on interest payments, they also carry risks that must be carefully weighed. Thorough preparation and legal documentation can help head off or mitigate potential issues.
ON TODAY’S PROGRAM, ROB ANSWERS LISTENER QUESTIONS:
At 63 and my husband nearly 80, we're considering buying another rental property in these uncertain times; is this a wise decision?
Having sold a property two years ago, we paid capital gains tax on it; was that necessary for everyone across the board?
I've never been good with money, but God has changed my life in recent years. At 65, I've saved in my 401(k) but have debts and am seeking advice on financial planning for the future.
Is it advisable to reduce my 401(k) contribution to the company match level and use the extra income to pay off my car loan faster?
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