With high property prices and tougher mortgage qualifications, parents are stepping in to help their kids purchase more and more.  Here are two ways they can help - acting as a co-signer and/or giving them funds for down payment, and some considerations for each.

Co-Signing A Mortgage

If a buyer does not have the income or credit established to qualify for a mortgage, a parent may be asked to act as a co-signer.  When you agree to co-sign on a mortgage you are fully responsible for that mortgage.  Here are some considerations for anyone considering to act as a co-signer:

• Undefined length of commitment - A parent can only get off the mortgage when the lender releases them from the mortgage, which is unlikely unless the child's position has greatly strengthened. The other way to get off is to refinance, but this can only be done once there is a 20% equity position, so again it can take many years.

• Responsible for payments - If the primary mortgage holder has difficulty making the payments or pays late, any delinquencies also impact the co-signer's credit. The co-signer is ultimately responsible to keep the mortgage current as well, meaning that to avoid bruised credit or a foreclosure that would forever impact their ability to access financing, they would need to catch the mortgage up.

• The buyer's income should be able to support payments - When a parent with significant income comes onto the file, it increases the maximum amount that can be purchased.  The risk to this is that it is easy for the buyer to over-purchase and end up with a payment that is more than they can afford without the co-signer contributing to the carrying costs of the property.

• Impact on the co-signer's future access to funds - When the co-signer tries to qualify for a mortgage or other loans for themselves in the future, lenders will take into consideration that they also need to be able to cover the carrying costs on any property they co-signed on.  This can limit the amount of funds they can access in the future for their own purposes.

Gifting Down Payment

Another option parents look at is giving funds to the child for down payment.  I'm referring to a true gift, one that does not need to be paid back. Here are some considerations when gifting funds:

• The gifter has less control - When a parent gifts funds, they will not have an interest in the property their child purchases or what they choose to do with it down the road. Because they are not tied to the property or mortgage, the child can make decisions without them being involved. If you are going to gift funds you do it with no strings attached! All mortgage lenders will ask you to sign a gift letter declaring it a true gift and you are recognizing that you have no interest in the property your child purchases.

• It may reduce the impact on the gifter in the future - By not being tied to the property and mortgage, a gifter limits the future financial impact on them personally.  Their credit is not impacted by any late or lack of payment on the buyer's part and it has no impact on their future ability to qualify for loans and mortgages.

• Give only what you can afford - If a parent will go into debt to gift down payment funds, or if it leaves them with no savings in case of an emergency, they may want to reconsider their position.

As you can see, gifting funds creates far less future ties to a child's purchase and can avoid complications down the road, which is why I usually recommend it as a preferred approach. It keeps accountability for the mortgage with the person who is actually living in the property. If someone does choose to co-sign, they should be in a very strong financial position and able to carry the mortgage they co-sign as well as their own financial obligations. And if a parent chooses to gift funds instead, it is important to let go and give those funds knowing they are trusting it in their child's hands from that point forward.

If you have questions about the options available to you to help someone purchase a home, I am happy to talk you through them.