Should or shouldn't you lend money to your grown kids? Tips follow....

The other day I had a parent contact me via ActiveRain from my local community.  Their son and daughter-in-law both lost their jobs and the wife was pregnant.  Their kids decided to walkaway from the home that the parents co-signed for on the mortgage.  Can they do a short sale?  Yes, if ALL parties on the mortgage application are in a REAL financial hardship.  The hardship will have to be proven with all asset and liability documentation.  Will it affect their credit score?  It depends on how they report the short sale or if there are mortgage lates.  Our conversation also detailed alternative options to consider.  I felt really bad for the parents as they just tried to help their son and didn't expect this to happen.  She was grateful she had found a non-judgmental and knowledgeable person to assist them through ActiveRain.

But the question remains, should we loan money to our grown kids or co-sign for a mortgage?  Have I done it?  Absolutely, for all three of my kids - loaning them money and co-signing.  But not all kids and situations will procure the same results.  Nor are our economic times and the housing market conducive to stability in your loan.

Getting a home loan is more difficult.  If your kids do not have much cash or credit history you may be their only option to take advantage of the current buyers market. 

Just be careful that you do not lend money to support bad habits or ruin the relationship you have with your kids.  If you decide to lend them money, carefully think out a plan and set up the terms.

Things to consider:

• The request - is it for a really good reason?
• Are they financially responsible?  Understand the logistics of whether you will be paid back.
• Can you afford to loan them the money?  
• Can you survive if they do not make the payment or you do not get paid back at all?

If you have doubt about any of the above, consider all other options first:

• Co-sign loan - you are still liable and it will affect your credit if the payment is not on time.
• Wait to purchase.

Let's say you decide to loan the money for a home purchase or give them a gift - make sure the TERMS are CLEAR.  Communicate that you are making a loan not a gift and what the repayment terms are.  If it is a mortgage or 2nd mortgage, make sure you have the proper documentation filed and of record at the courthouse. 

Are you going to charge interest for the interest earnings you lose because it is not invested?  You might charge the same rate the money would be earning if it were in a savings account, or what the bank charges for a similar loan, or perhaps the prime rate.  It is up to you and your children as to what you agree to.  You will also want to talk to your CPA for tax purposes.

And please, protect yourself and your children - put every last detail in writing with all parties signing to make it official before a notary.  This can become a serious transaction if something should happen to one of you, or conflict arises and you risk ruining your relationship.

All that being said, my parents helped me when I bought my first house.  They charged me interest.  A mortgage and note were filed.  Every payment was made.  The foundation of financial responsibility was long established for my children as the apple doesn't fall far from the tree.

This is my personal opinion and not a professional opinion.

Make today a great day.