How to help your child buy a home

Sunday, November 25, 2007
By MARY AMOROSO
THE RECORD

Barb and Herb Kenny of Chester thought that both the time and the market were right to invest in real estate for their young adult daughters.

Malorie Kenny, a 24-year-old teacher in New York City, had been living in Jersey City for two years. Her younger sister, Brittany, 22, got a teaching job in the city as well.

"I have two daughters who said they would love to live together," Barb Kenny said. "They were ripe and ready and the location in Jersey City was a good one. And we did it for an investment for ourselves. Living in the city is my dream, and Jersey City is on the rise."

In May, the Kenny parents closed on a two-bedroom, two-bath condo in Mandalay on the Hudson, a condo conversion project with spectacular views right on the Jersey City waterfront. The real estate is in the parents' name, and the daughters pay rent that almost covers the mortgage.

"They're in a nicer area than they would be on their own," said Kenny. "To a certain extent, you could say we're spoiling them, but not really. We wanted to make an investment anyway. If the time wasn't right, we wouldn't have done it."

Some parents buy the home themselves, and use their children's rent payments to help with the mortgage. Others provide the down payment, either through a gift or a loan or by becoming part owner of the home. Still others co-sign the mortgage, especially if the adult child's credit is not strong. And some parents contribute large amounts of cash so that their adult child can afford a better home in a better neighborhood.

Whatever the approach, parents who head down one of these paths needs lots of financial savvy and a good deal of common sense to avoid potentially disastrous pitfalls.

Mary Boorman is senior vice-president of marketing and strategic planning for Pinnacle Cos., which handled the condo conversion at Mandalay on the Hudson as well as the Siena in Montclair. She said that particularly over the last year she's seen many customers whose parents assisted with the down payment at the complexes, where prices start in the low $400,000s.

"Nine times out of 10, these young people have good earning potential and the money to sustain the mortgage, but they don't have the down payment to get in the door," she said.

Helping an adult child to buy a home can be part of estate planning. Right now, estates of more than $2.5 million are subject to estate taxes. That will drop to $1 million in 2011, unless Congress takes action. Financial planners often recommend that parents with larger estates begin transferring their inheritance to their children year by year, giving their children the maximum $12,000-per-spouse gift that the government allows, tax-free.

Peter Traphagen of Traphagen & Traphagen Certified Public Accountants in Oradell, presents this scenario.

"Let's say that a $96,000 down payment is required on a $400,000 home, and the parents wanted to lend the child the $96,000," he said. "The husband and wife can each give $12,000 a year. What would happen is that the parents would gift the child $12,000 and $12,000 for 2008, 2009, 2010 and 2011. They would use their annual gift-tax exclusion to effectuate repayment of the loan."

Traphagen said that banks might not look kindly on another loan on the property when doing a mortgage analysis, and so the loan might have to be portrayed as a gift.

Phyllis Gallucci, president of Platinum Capital Group in Lincoln Park, said that if a member of the immediate family -- cousin, brother, sister, mom or dad -- is giving the buyer the down payment as a gift, the mortgage company will need to see a gift letter from the family member and proof of the family member's ability to give the gift.

Gallucci said she's seen parents take money from their 401(k) retirement accounts to help a child finance a home purchase.

She's also seen parents refinance their own homes to pull out equity to give a child buying a home.

That can spell trouble.

"Some kids are going into foreclosure, and parents are losing their money," she said. "It's really a vicious circle."

There are other consequences to consider.

Attorney Henry Klein of Klein and Radol in Englewood explained that parents often give money to their married son or daughter, but don't treat it as a loan.

"Children buy the property and, years later, regrettably there's a divorce," he said.

"Then the issue comes up about satisfaction of what is now seen as a loan. Parents need to protect themselves. If they don't protect themselves, it's deemed a gift."

Meanwhile, experts say parents should think long and hard before agreeing to co-sign a mortgage for a child.

"If the child defaults on the loan, then the co-signers are liable," said Klein.

"If parents are considering co-signing, they should consider having themselves on the title as well. If they are taking a risk on the mortgage, they need the protection of having themselves on the deed as well."

Financial planner Traphagen said he never recommends that parents co-sign a mortgage.

Elizabeth Givener got three generations involved in the purchase of a one-bedroom condo in Hoboken.

"My son Josh was going to Rutgers Law School, and he and his fiancee were living in a hole: a fourth-floor walk-up in what I thought wasn't such a great neighborhood," Givener said. "I have a mother who is elderly, and who eventually is going to be leaving me an inheritance. I approached her and asked whether she would be willing to pay for Josh's apartment, essentially giving me part of my inheritance early."

Josh, his mother and his fiancee went house-hunting for six months.

"I wanted new construction from the beginning," Elizabeth Givener said. "We looked at a lot of older places. You really don't get much for the money in Hoboken. And a lot of older places don't have parking."

They eventually settled on a condo at the Upper Grand complex, where the father of one of Josh's friends had purchased a unit for his son.

The Giveners got a pre-construction price of $350,000. Using money from her mother, Elizabeth Givener paid cash and put the title in her name. Her son pays maintenance and taxes of about $750 a month.

Josh said, "We had to wait two years, but we got really good pricing. In the old brownstone where we were living before, rent was through the roof. Now, I'm paying far less."

Elizabeth added, "This allows my mother to witness the good she's done in her lifetime. And Josh could eventually end up owning the condo: We have to see how the future goes. In the meantime, it's a creative solution."

E-mail Mary Amoroso at MaryAmo@aol.com.
* * *

Some do's and don'ts

? Avoid taking money from retirement accounts to help your child buy a home. Avoid refinancing your own home to give your child cash. You are closing in on retirement and need to secure your assets, while your child has 30 or 40 years of earning potential ahead.

? Think very carefully before co-signing your child's mortgage. If your child falls behind on payments, the lender will come after you.

? If you are lending your child the down payment on his new home, get the terms of the loan in writing.

? Talk to a financial planner about the best way to structure things if your contribution to your child's home purchase is part of your estate planning.

? Consider letting your child live with you for a while, so he can save more rapidly for a down payment or remodel a fixer-upper.

Link here