Parental financing

What is Parental Financing?

Parental financing is a term used to describe the process where parents provide financial assistance to their children for the purpose of purchasing a home. This can take several forms including gifting money, providing a loan, or co-signing a mortgage loan. Parental financing is becoming increasingly common as housing prices continue to rise and younger generations struggle to save enough for a down payment.

How Does Parental Financing Work?

In a typical parental financing scenario, parents can give their children money for a down payment, closing costs, or other expenses related to purchasing a home. Another option is for parents to loan the money, with the expectation of being paid back over time. In some cases, parents may choose to co-sign a mortgage loan, which means they are legally responsible for the loan if the child defaults.

Implications of Parental Financing

While parental financing can help children purchase a home they might not otherwise be able to afford, there can also be potential downsides. For example, if parents co-sign a loan and the child is unable to make the payments, the parents could be held responsible. Additionally, gifting or loaning large sums of money can have tax implications for both the parents and the child. It’s important for both parties to fully understand the potential risks and benefits before entering into a parental financing arrangement.