As our children become young aduts, I am wondering what we can do to set them up for success when buying their first home?
Not too long ago, we experienced a time when money was free flowing and loans could be had with a wink and a handshake. But those days are gone, likely forever. When I was a kid, my parents talked about saving the 20% down and being sure to pay all the bills on time in order to be a good position to buy a home, and, after a couple decades, we are right back where we started – save and establish good credit! After many “easy money” years, our newest group of home buyers may not have been educated with the old mantras – save – pay on time – and they may shocked to find out that they don’t have what it takes to get a loan. So what does it take, and what can you do to help?
Saving enough money takes time, and they can never start too young to be savers, but if you are feeling particularly benevolent, most lenders will allow gifts from family for a down payment, with a proper gift letter, of course! Do NOT make the gifts without a gift letter unless it is years in advance – a lender will review their accounts and require substantiation of all recent deposits.
Establishing god credit is something they will need to do on their own, but you can help set them up for success. A loan applicant must have credit in their name (and not a card they are authorized to use that belongs to mom or dad) on three separate lines (cards, car loans) and they must NEVER have made a late payment. The cards DO NOT have to be actually used to establish a credit history – the potential homebuyer just has to have been granted the cards. If they do use the cards, then as a general rule, it is not a good idea to charge more than 50% of the credit granted in any given payment cycle, at least if they are nearing a time when the plan to apply for a mortgage. If they miss a payment, that line of credit is disqualified and they will need to show the existence of 3 lines of credit on which they have never had a miss. If they don’t have three lines of credit showing on their credit report, they will only be eligible for an FHA loan, and must be able to show 12 months of payment history on other things such as a cell phone bill or utility bill in their own name (note: utilities paid on a budget plan do not satisfy this requirement).
So what should you be doing to help the next generation of home buyers? Educate your kids & grandkids about how they will have to learn to use credit cards responsibly and how they will always have to pay their bills on time. When you feel they can handle a credit card (or 3), help them choose appropriate no fee cards. Consider checking in with them to make sure that they are remembering to pay the bills (preferably in full). Some banks make credit cards available to unemployed students as early as age 18 – while these cards must be secured with a certificate of deposit, they allow young adults to begin building credit in their own name. With a little coaching, we can all help the next generation of homebuyers to be ready to successfully purchase their new home.