Buying a house can be difficult. It is not uncommon for family members to help each other out when buying property. In our latest post, we will discuss some things to keep in mind when helping family members buy real estate in Greater Toronto Area.
As you can imagine, once you add money into the family dynamic, things can get tricky. If you plan on lending or giving money, make sure it is with someone you can trust, who isn’t prone to falling through on their obligations. You should also consider how this transaction or loan will make other members of your family feel. Never sacrifice a family relationship for the sake of purchasing a home. Set the ground rules early and make sure you are both on the same page.
Set The Terms Right Away
Create a contract just as you would in any other business transaction. Lay out everything in writing so there aren’t any questions or qualms about the repayment terms. Here are a few things you may want to include.
How much will need to be repaid?
Are you expecting the full amount to be repaid, or will some of the money be considered a gift? Make it very clear how much will need to be repaid and when.
Is the property in their name right away?
Work with your family member to determine whose name the house will be in until the loan is repaid. Maybe you purchase the house in your name and transfer it once you have been paid in full. Other times, this isn’t necessary, and the house is purchased in your family member’s name.
What happens if they don’t pay you back?
Will you create a penalty? How will it be enforced? What happens if they stop paying you back altogether? It is best to work all of these things out beforehand and have a meaningful discussion with your relative. You would never want to damage your relationship.
Who decides the budget, home type, location, etc.?
You shouldn’t get to pick the house yourself, however with a financial stake involved, you should have some say in what can be purchased. Don’t let them buy a house for more than it’s worth, or in a bad area.
How You Can Help
Give – You can give up to 15k to a family member without any tax implications. Discuss with your accountant to set everything up properly. Many lenders like to see the money in the accounts ahead of time instead of at the time of purchase. It is best to pay by check or wire transfer to make things easily transfer.
Coborrow – Like cosigning on a car, you can get on the loan together. This will help their odds of qualifying for a loan, but it can also be a direct problem for you if they default.
Lend – Hire a professional to help set up the terms. Consider charging interest. A lower rate that they would pay for a traditional mortgage and more than you would make simply by having your cash sitting in savings. In this scenario, everybody wins!
Buy In Your Name – Buy the property yourself, then set up a rent to own agreement with your relative. If they default, you foreclose and sell (or keep) the house. This will help you build equity and will help them become homeowners when they are ready.
Make Sure They Understand Their End Of The Deal
If repayment is scheduled for a certain date, this needs to be respected. Sometimes your kids or other family members will try to get away with paying a few days late or maybe doubling up next time. This is the kind of thing you want to avoid from the get-go. It will only create arguments and resentments.
Make Sure They Can Afford To Be Homeowners
Owning a house in Greater Toronto Area comes with its own set of costs. Aside from repaying you or the bank, your family member will need to be able to swing maintenance, repairs, taxes, insurance, and interest each month. Many of these expenses weren’t things they had to pay if they were previously renting. Make sure they understand that home ownership is more than just a mortgage payment.