My Kid’s Still Living at Home: How Parents Can Empty Their Nest

BY Laura Agadoni

For the first time in 130 years, young adults are more likely to live with their parents than with a partner or spouse — or have any other type of living arrangement, for that matter. Here’s why Mom and Dad nab the top spot (and it has nothing to do with laundry):

    • Americans are getting married or settling down later.
    • Unemployment has increased in recent years.
    • Wages are down.
    • The recession (and weak job market) of 2008 led to an uptick in college enrollments, which in turn, led to an increase in student loans.

It’s one thing to choose to live together, but it’s totally different if economic reasons are forcing your hand. If you want your child to move out and the feeling is mutual, there are ways you can help.

1. Give cash for a down payment

Working millennials can often afford and are responsible enough to make regular mortgage payments, but they oftentimes cannot save the money required for a down payment. That’s where you can help. If you have the cash, you can gift it to your child. The IRS allows individuals to give cash gifts of up to $14,000 without being taxed on it. Two parents can give up to $28,000 tax-free to their child. And if that child is married or lives with someone, the spouse or partner could also receive $14,000 from each of you, for a total of $56,000 tax-free money.

2. Loan the down payment money

Loaning money prevents you from paying any gift taxes. If your child already has many debt obligations, however, heaping another loan onto the pile might not help. But if your child’s debt-to-income ratio is low, lending the money might work out well for everyone.

To be considered a loan instead of a gift for tax purposes, you’ll need to charge interest at the market rate and set up a repayment schedule. To do so, go to this IRS page to find out the minimum rate to charge to avoid gift taxes. You can charge that rate or more. Then decide the terms of the loan, use a loan calculator to determine the monthly payment, and put everything in writing. You can also get help from a financial advisor.

3. Refinance your home to get cash for a down payment

If you don’t have easy access to large sums of cash, but own your home, you could get a cash-out refinance, which allows you to use the equity in your home to get money. To do this, you would get a new mortgage loan for more than what you owe. This new loan replaces the existing one. You would then get the difference in cash — cash your child could use to get into his or her own home.

You typically get a better interest rate with a cash-out refi than you would by taking out a personal loan.

4. Cosign on the loan

Your child might be able to afford to buy a home, but a bad credit score prevents him or her from qualifying for a loan. If you consign, the mortgage loan is more likely to be approved. But by doing so, you will become a borrower as well. The duty of making the mortgage payments falls on you if your child stops making them. So make sure your new financial partner understands the importance of making the mortgage payments each month and on time before you cosign.

Once your child’s credit score improves enough, he or she can refinance the loan to get your name off of the loan.

5. Buy the home yourself and rent it

If you can get a mortgage loan, you could buy a home and rent it to your child. By stashing away some or all of the rent money your child is paying, you can gift it back and then he or she could use that money to buy the home from you at some point.

You could formalize the arrangement by setting up a rent-to-own agreement with the help of a real estate attorney. This legal contract sets up an arrangement where your tenant — in this case your child — buys the house by a certain date, say in three to five years. By then, it will be more likely for your child to get financing. The home’s title will be in your name until your child buys the house. Usually, with rent-to-own deals, during the time you own the home, tenants treat the property as theirs, including being responsible for repairs, maintenance, and improvements.

Note that you will become a landlord with this arrangement, so make sure you understand what that entails. As long as your child pays rent, both of you are subject to the landlord-tenant laws of your state.

Bottom line

It’s great to help your child buy his or her first home, but only do it if you can afford it. Unless you’re in a financial position to help, and without touching your retirement savings, your assistance should probably be limited to moral support, advice, and guidance.