Like many comfortable parents of millennials, Jenny and Steven Lagos want to help their children get established as homeowners.
Both daughters, 37 and 35, are successful and live in San Francisco where astronomical home prices spike wildly in bidding wars. It is an expensive place to live, but neither daughter has plans to leave. “Once our grandchildren were born, we thought it would be so great if our kids could have a place to live [that they owned],” said Jenny Lagos, whose older daughter and husband have two young sons. “So we thought if they were willing to go in [together] on a duplex, they could afford it.”
So the retired couple secured a home equity line of credit on their San Diego house. They hoped to assist with the hardest home-buying stepping stone — the down payment. Their daughter and her husband, and their younger, single daughter, prequalified jointly for a mortgage in the mid-$900,000 range. The trio looked for a duplex, but right-priced duplexes were selling weeks later for up to $200,000 over the asking price. They are resigned to renting for now. Still, the Lagoses are keeping their home-equity line of credit, just in case the housing market takes a dive — even though Jenny Lagos acknowledged that’s unlikely. “It’s pretty laughable when you talk about the market going up and down in San Francisco,” she said.
More millennials (ages 23 to 38) are tapping their parents’ resources for help with a mortgage down payment because scraping up enough is an enormous challenge. Young adults have some unique financial disadvantages: They have lower incomes than baby boomers had as young adults, according to a Federal Reserve data analysis conducted by the nonprofit group Young Invincibles. Most of them also have skimpier assets, particularly those who are burdened by student loan debt. Indeed, just 30 percent of millennials are current homeowners, a historic low for the under-35 demographic, according to a recent Harvard University study.
Additionally, slow wage growth and a high cost of living makes squirreling away enough cash for a down payment next to impossible for many first-time homebuyers. Then there are the twin challenges of housing prices still rising year over year — though the pace has slowed — and higher mortgage interest rates that make buying a first home more expensive. Many millennials are waiting for the housing market to cool off before attempting to jump in.
“To put things in perspective, the median housing price in Pasadena is $800,000, but nationally the median housing price is $220,000, “ said Earl Jordan Yaokasin, CEO of Wealtharch Investment Services in Pasadena. “So Pasadena housing prices are about four times as much as the national average. But the income of millennials is not four times as much as the average national income. That is what is causing the affordability problem.” As a result, many millennials either have to borrow from their parents or have their parents cover the down payment outright, said Yaokasin, who is also a chartered financial analyst.
Home buyers typically need to put down 20 percent of the purchase price for conventional loans (more than 60 percent of buyers use a conventional loan) and pay closing costs of 2 to 5 percent of the home purchase price, said Yaokasin. A growing number of mortgage loan borrowers are making smaller down payments that range from 5 to 10 percent of a home purchase price; borrowers putting down less than 20 percent have to pay Primary Mortgage Insurance (or PMI), according to myhome.freddiemac.com, an information website exploring renting versus buying and the mortgage process. Millennial buyers need to factor in the additional costs of property insurance and property taxes when considering the entire cost, said Yoakasin.
But with high rents and payments for a car, insurance and gas, just saving for a 20 percent down payment on an $800,000 house — that would amount to $160,000 — is an incredibly difficult challenge. “Two-thirds of people I speak with who are millennials have debt and their saving habits are not great,” he said.
So many millennials turn to their parents for help. More than 26 percent of borrowers got help from a relative to make a down payment from September 2017 to 2018, up from 22 percent in 2011, according to the Federal Housing Administration’s 2018 annual report. The FHA, an agency within the U.S. Department of Housing and Urban Development, insures lending institutions against riskier loans. First-time homebuyers with imperfect credit often secure FHA loans because they cannot qualify for standard loans that require a good credit history. Likewise, FHA homebuyers can put down as little as 3.5 percent of the home price, compared to conventional mortgage loans that require 20 percent. Riskier borrowers now make up about one-tenth of all home loans, according to the FHA.
Enter Mom and Dad. “Parents who want to help their adult children should really talk to an advisor before they do it,” said Neal Frankle, a certified financial planner at Wealth Resources Group in Westlake who specializes in guiding millennial clients. “You have to look at the whole situation, and there is no single, right decision for every situation,” added Frankle, who also counsels millennials in his creditpilgrim.com blog. “But the best way to do it is to have the children make payments immediately on the loan; the second is to defer payments until they get settled, maybe in 10 years, and the third is to make a gift, the worst alternative versus a loan.”
Unless parents are willing to gift it freely with absolutely no expectations, they should reconsider bankrolling the down payment, said Frankle, who is the father of three daughters, two of whom are millennials. If you are not clear about expectations, he notes, it could open the door to resentments and other family problems. .
Kathy Miles, a real estate agent for Keller Williams in Pasadena, has helped a number of millennials buy their first house in the past year. In her experience, young doctors, lawyers, dentists, accountants or tech workers did not tap their parents for a down payment — but they did move back in with their parents until they’d saved enough to pay for it themselves. “I have worked with six millennials in the last 12 months and about half needed help from their parents and half did not,” said Miles, 31, who owns a house with her husband and bought it without parental assistance. “Two needed help with the down payment and those parents also cosigned onto the loan. The third millennial assumed the house from her parents who had dementia. But all of my friends who purchased a house in their 20s did get help from their parents.”
Homebuyers who need help with a down payment have been viewed as riskier because they have less of their own hard-earned cash invested in the property. If home prices drop, jobs are lost or some other financial calamity hits, the thinking is that buyers assisted with a down payment are quicker to walk away because the loss is less painful. In contrast, some lenders and financial advisors think that getting assistance from parents or a relative makes the buyer feel a sense of moral duty to protect their family’s investment. The evidence is mixed. Loan tracking data from the FHA that followed loans in 2010–2011 found that 7.6 percent of loans involving family assistance with the down payment are not in default for 90 days or more. That is less than the 9.3 percent of buyers who got down-payment help from an unrelated entity or the government. Only 5.2 percent of buyers who received no help with a down payment were delinquent on their FHA loans.
The big picture? It’s a good idea for parents to help their millennial kids — assuming they can afford to and the kids are responsible, said Frankle. But it is also a good idea to check in with a financial advisor before doing so. “It is better than waiting to die to give it to them, but you have to be sure that it does not create the wrong value,” he said. “From a relationship and financial basis, you are better off to make it a loan, but if that is not viable, then do it, let go and forget about it.”