WASHINGTON -- With today's turmoil in the housing market, hitting up mom and dad for a down payment might be a young buyer's best route to homeownership.
It's hard for the younger generation to become first-time homebuyers today as they try to juggle numerous financial responsibilities, experts say.
"Stakes are higher," says Carrie Schwab Pomerantz, chief strategist of consumer education with Charles Schwab & Co. "Today, young people are solely responsible for their retirement. A lot of young people are coming out of college with high levels of debt."
Here are three ways parents can help their children buy homes:
Experts say simply giving adult children cash for a down payment is one of the smoothest ways to help them buy a home. For parents with the means, gifts can avoid intergenerational squabbles and misunderstandings.
"Helping with cash is pretty clean, pretty easy," says Jack Guttentag, an emeritus professor of finance at the Wharton School of the University of Pennsylvania.
Guttentag helped his adult son buy a house in Venice Beach, Calif., about 15 years ago. Prices were high, so Guttentag ponied up for the down payment, while his son had enough income to carry the mortgage.
"It turned out well," Guttentag says.
To avoid triggering a taxable event, Guttentag spaced out his gift over two years. An individual can give $12,000 a year to a recipient without having to pay a tax on the gift. Therefore, a couple could give an adult child and the child's spouse a total of $48,000 in one year.
Yet gifts can become complicated when lender institutions have rules that limit their size. From a lender's point of view, a debt obligation - even a gift from parent to child - could weaken the security of the mortgage, Guttentag says.
"When lenders assess someone's qualification for carrying a mortgage, they take into account their other debt payments," he says.
Some lenders can be concerned that reported gifts aren't really gifts at all and might require borrowers and parents to sign an affidavit that no repayment is expected, Guttentag says. To avoid too much scrutiny by a lender, Guttentag suggests giving your adult child a down payment well in advance of applying for a mortgage.
Cosigning or investing in a house
Some parents may have limited resources as their home equity has come under pressure. Others may need their investments for retirement. Yet they can still help their adult children by cosigning a loan. Cosigning can help make a lender feel more comfortable with extending a mortgage to an adult child, says Adele Brady Bolson, a certified public accountant in Washington state.
However, if payments aren't made, the mortgage company will go back to the parents, she says. And the parents' credit can be affected.
Investing in a home can also work for parents that want to be paid back.
Families must be careful planners and good record keepers over time to avoid confusion and intergenerational quarrels. All parties should understand how their respective shares in the equity of the house would be divided and change over time. As children make the mortgage payments, their share of the equity in the house will increase.
"The investment has the potential for conflict because of changes that occur over time," Guttentag says. "If both parties agree on what the rules are and keep accurate records, there isn't going to be any conflict."
Schwab Pomerantz says the "gift of knowledge" is a good option for parents without the means to contribute cash or invest in a child's home.
"Very few families have frequent conversations about money and investing," she says. "So you're already starting at a deficit in terms of families who talk about finances."
The lack of conversation is not a socioeconomic issue - families across the wealth spectrum are missing out on these important talks, Schwab Pomerantz says. She suggests "helping kids weed through the various mortgage alternatives to avoid these scandalous offerings that are inappropriate for them."
Adult children should understand the importance of borrowing within the limit of what they can afford, rather than becoming overly indebted to a home.
"It's never worth it to be house poor. ... It limits you from doing so many other things," Schwab Pomerantz says.
Current turmoil in the mortgage market magnifies the importance of ensuring that all parties understand the terms of a mortgage before buying a home, Bolson says. "If I'm going to be giving money to my child, I need to make sure that my husband is OK with it," she says. "All parties need to agree."
Bolson also recommends that a first home for adult children should cost no more than the average for the community, especially when parents are helping financially.
"You want to be cautious about whether this is just the beginning of kids wanting parents to buy what they themselves can't afford," she says. She added that in most circumstances parents "should only help with the first home. When [adult children] are ready for the dream home they can trade up to it."