| April 20, 2015

Are Mom and Dad Responsible for Their Children’s First Home, Too?

A growing trend seems to suggest they are.

Hit up the Bank of Mom and Dad

Parents are always proud to see their children reach milestones – from lauding over their first steps to heralding their first words, to their first day of college and the day they walk down the aisle. Even as they become full-fledged adults, the thrill of seeing children’s “firsts” does not disappear. This may explain why, these days, an increasing number of parents are helping their Millennial children attain their first home.

This isn’t a new trend but has been growing in popularity.  According to a report by loanDepot LLC, a lending company, five years ago no more than 17 percent of parents helped 18-34 year olds purchase a home. Now 31 percent of parents expect to help their millennial-aged kids achieve that dream – 50 percent will contribute towards the down payment, 20 percent will cover the closing costs and 20 percent will co-sign the loan.

“Support from parents is playing a significant role in the housing recovery, and this new research indicates the trend will increase,” Dave Norris, president and chief operations officer at loanDepot LLC says.  “First time home buyers comprise 28 percent of today’s home buying market, an almost all-time low. Through the survey, 75 percent of Millennial-age home-buyers who received financial support from their parents said that assistance made it possible for them to buy a home. Without that financial support, it’s likely the pool of Millennial first-time home buyers would be even smaller than today.”

Let’s reiterate. According to Norris among all first time home buyers, 28 percent are Millennials. Seventy-five percent were able to buy their home because of the help they received from their parents – which mean only 25 percent bought their home on their own.

As the data shows, in the past parents dipped into their savings – risking their own financial security – so their children can buy their first home. However, that’s about to change. (Don’t worry Millennials – the “bank of mom and dad” is still open.)  Fewer parents will dip into their savings (67 percent will dip into their savings, down from the 72 percent who did in the past); more will refinance their homes, take out unsecured personal loans, sell equity and some don’t know yet where the proceeds will come from but they expect to help.

Not only will fewer parents dip into their reserves, they will also be helping less with home purchases.  It doesn’t mean that the bank is closed but parents will simply re-direct the areas in which they help their adult children.

  • 50 percent of parents will contribute towards the closing cost, down from the 65 percent who did in the past
  • 33 percent will allow them to continue to live at home in order to save money
  • 30 percent of parents will help their children pay for other expenses
  • 22 percent will allow them to move back home/Boomerang
  • 20 percent will help them with closing costs
  • 20 percent will co-sign the mortgage
  • 18 percent will help them pay student loan debt

It is no secret that Millennials are saddled by student loan debt, the jobs market is still lagging, and of course those who were lucky enough to land a job might be earning entry level salaries making it difficult to pay down their debt let alone save. If these are the reasons why Millennial children need mom and pop’s help, then taking on the responsibility of homeownership may pose a larger problem down the road. It also begs the questions:

“What happens once these millennials have met the closing costs and are settled in? And “Can they maintain or retain these homes?”

Maintaining stability after moving in

Maria Gaitan of Consolidated Credit says every parent’s dream is to give their kids the world and helping their children buy their first home is admirable. However buying a home is more than just saving up or scraping up the closing costs or 20 percent down payment to avoid costly mortgage insurance.

“If these young adults are drowning in debt; are jobless or at entry level salaries, they may face difficulty sustaining their homes,” Gaitan says. “There are the recurring monthly mortgage payments, property taxes and interests. A struggle or inability to meet these responsibilities is to an extent comparable to the subprime borrowing that crashed the market a few years ago. Parents will either have to keep giving handouts to their children or children will have to keep scraping each month to avoid a foreclosure and loss of equity.”

Although the popular narrative is that Millennials feel a sense of entitlement, part of the survey proves otherwise. Of the Millennials who purchased a home, 39 percent made it possible by cutting back on entertainment and eating out less often. This suggests that Millennials are quite capable of making sacrifices of their own. What’s more, 68 percent of the parents who helped their children attain homeownership view the financial support to as a gift, yet close to 36 percent of Millennials view the help as a loan rather than a gift and plan to pay it back in the future.

Regardless of who has to make the sacrifices or whether help was a gift or a loan, there are numerous factors that need to be considered before making the jump into homeownership. It is vital that first time homebuyers educate themselves on the where-with-all to owning a home and understand that coming up with the money to seal the deal isn’t all there is to it.

A good place to start is by using Consolidated Credit’s mortgage calculator  to help you ascertain how much your mortgage payments will be, the interest rates and your overall financial readiness to purchasing a home. Home retention and foreclosure prevention is also important. In order to buy a home and keep your home, be sure to visit Consolidated Credit’s Housing department for help with all your housing and homeownership needs and questions. Dial  to speak with a certified housing counselor for free.

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