Home affordability has reached its worst level since 1984. Today the average mortgage payment requires 38% of the median household income showing housing affordability has deteriorated to its lowest level since the mid-1980s according to Black Knight.
With home prices generally still at their post-pandemic highs and the average 30-year fixed-rate mortgage hovering around 7.24% would-be homebuyers are pushed to the sidelines. To afford a median-priced home of $400,000, homebuyers would need an annual household income of $110,871, according to Bankrate’s Housing and Income Study.
Bankrate’s February 2024 Down Payment Survey found more than half of would-be homeowners (54 percent) said their incomes were not high enough to afford the required down payment or closing costs. But it’s not just recent college graduates who find themselves unable to afford a home. Adult children in their 40s and 50s face a similar predicament with inflation and home prices outpacing their earnings.
Yet, help could be on the way for adult children whose parents can step up to provide the assistance needed to purchase a home and begin building future equity. Parents could cosign a mortgage thus backstopping the loan and being responsible for any missed payments. However, such a generous gesture comes with the risk of them incurring the burden of another mortgage payment or risk damage to their credit should their child default.
Parents with adequate financial resources and liquidity may gift their children the money required for a down payment. However, under current tax guidelines gifts totaling over $18,000 a year must be reported as income. Would-be homebuyers may also find assistance if their parents provide them with a family loan. This still requires that their parents hand over a tidy sum of cash that may negatively impact their retirement savings and potential earnings.
However, some younger homebuyers may need a reverse mortgage to buy a home in today’s market–their parent’s reverse mortgage. Older homeowners who wish to assist their children in purchasing a home and who don’t want to tap into their retirement savings or draw from their cash reserves could opt instead to get a reverse mortgage. The parents could use a portion of their reverse mortgage proceeds to provide the needed down payment or pay a portion of their child’s monthly mortgage payment.
This would allow them to leave invested and liquid assets untouched while generating the cash needed to help their child. The trade-off is that mom and dad are offering up an increasing portion of their home equity to help. However, if they had planned to leave the home to their children such a strategy could be seen as an early inheritance.
A 2023 Charles Schwab survey of more than 700 American investors between the ages of 27 and 95 found more than three-quarters of parents plan to leave their homes to their children when they die. And with this being one of the most common objections to getting a reverse mortgage, an early inheritance strategy may overcome this common misgiving.
With home prices and interest rates at record highs, adult children of all ages may need their parent’s assistance to buy a home. A reverse mortgage, when suitable, could fit the bill.
By Shannon Hicks