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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Borrowing from Parents Isn't Risk-Free

by Laura Rowley

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Posted on Thursday, March 8, 2007, 12:00AM

As warmer weather ushers in another home-selling season, buyers are squarely in the driver's seat. New home sales plummeted nearly 17 percent in January, the Commerce Department reported last week, and inventories rose to a 6.8-month supply.

"For the first time this decade, we have a total swing toward buyers," says Walter Molony, spokesman for the National Association of Realtors. "Buyers can take their time and be methodical. Sellers have gotten the message; they are motivated to make concessions."

Tapping the Bank of Mom and Dad

On the other hand, new homes aren't exactly cheap after years of torrid inflation: The median sales price in January was about $240,000. The difficulty for many first-time buyers, who are 32 years old on average, "is coming up with cash for down payment," says Molony.

That hurdle has some would-be home-buyers turning to Mom and Dad for assistance. And baby boomer parents appear eager to open their wallets. Almost a third of working Americans 45 and older with a child over age 25 pay rent or provide housing for their offspring, according to a recent survey conducted by Brightwork Partners for Putnam Investments.

But there are potential pitfalls for both sides when adult children tap the First National Bank of Mom and Dad, experts say.

"If I save up a down payment and buy a house, I have a different experience than if my dad says, ‘Here's a check for $50,000, go buy a house,'" says Karen Sheridan, a money manager and author based in Lake Oswego, Ore. "You have to do it on your own so you get to be who you are, make your choices and mistakes, and feel your own successes."

An Emotional Investment

Sheridan recommends that parents consider a dollar-for-dollar match toward the goal, rather than writing a large check. "A parent might offer $100 for every $500 the child saves," she suggests. "That's helping a child step up to the plate of adulthood."

Other counselors say the decision depends solely on the relationship between parent and child. "I think doing things on your own is one thing, but having to be completely alone in the world is another thing," says Olivia Mellan, a Washington, D.C., psychotherapist and author, who's specialized in money therapy for more than two decades. "It's OK as long as the person is not disempowered by the loan."

Borrowing from parents may be unavoidable in the nation's hottest housing markets. "A lot of people would never be able to buy their first house in California without some help," adds Karen McCall, a financial counselor and founder of the Financial Recovery Institute in San Rafael.

But beware the parent who uses lending to keep children emotionally indebted, McCall warns: "Some parents are invested in being needed by kids. There may be strings attached. The parents help a child buy a house or do whatever, and then they feel they have a say over what the kids do with their money."

Family Dynamics

Sheridan agrees. "Parents are not the bank -- they are emotional. They may say, ‘Why are you putting central air in? You don't need that.' Or ‘You buy this new BMW but had to borrow money from me for the house?'"

Talk about parents' expectations upfront, outlining the worst-case scenarios: What happens if you default on the loan? Clarify that the money toward a home doesn't give parents a vote in your design or other decisions. Put everything in writing.

Consult a financial advisor to ensure the promissory note is written properly. For example, with a mortgage loan, the Internal Revenue Service may require that the interest rate be tied to a specific benchmark. There may be gift tax consequences if the parent forgives a large obligation.

Meanwhile, realize that borrowing can quickly become an ugly family affair. Children who hit up parents for money should be prepared for the resentment of siblings who don't -- and potential squabbles over the parents' estate, experts say.

Don't Subsidize a Lifestyle

Beyond home buying, many parents subsidize adult children in other ways. Some 45 percent of middle-aged workers with grown children provide financial support of about $2,500 a year on average, the Putnam survey found.

"There are millions of Peter Pans of the financial set," says Sheridan. "I see this more and more. When I meet with a new client, I always ask about their adult children. Many times they are paying for one adult child or more."

Before they give, parents should consider whether the money is to enhance a child's future or subsidize his lifestyle, and make a distinction between a one-time event and a chronic condition, Sheridan suggests. For instance, she says she helped her daughter with medical expenses after the daughter's twins were born prematurely, and a mediocre health insurance plan saddled her with tens of thousands of dollars in hospital bills.

That's very different from children who continually seek loans to pay off credit cards, or investments in a series of get-rich-quick schemes, Sheridan says. "The bottom line is, is the child completely independent of you in all ways, including financially? Then it's OK to make the offer to help."

Shred the Parental Safety Net

Finally, borrowers should be certain parents can afford to give or lend the money, advisors say, because some parents compromise their own security to help their children.

Do you want to borrow money now, and later find yourself in the position of supporting elderly parents along with your own children? The Putnam survey, for instance, found roughly one in five workers age 45 and older provide financial support to a parent.

"I see that all the time, parents who have children in private school but no savings for themselves," says McCall. "As they say on airplanes, put the oxygen mask on yourself first. We're all going to get old someday -- we should be modeling for our kids that we're going to take care of ourselves."

"It's much better if parents don't offer and children don't ask," adds Sheridan. "Then you have very clear relationship lines that aren't muddied by money. A child who borrows never gets that opportunity to really be on her own. That creates anger, anxiety, and a feeling of vulnerability. You don't have the same life experience if you always have a safety net."

Correction and Clarification

In my earlier column "Kids Can Be a Boon at Tax Time," I stated that the Child and Dependent Care tax credit covers nanny, nursery school, kindergarten, and summer camp costs. The credit does not cover kindergarten costs. For more information, see IRS Publication 503.

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  • damu_patel - Saturday, March 10, 2007, 11:12AM ET  Report Abuse

    • Overall: 5/5

    That is true 100% true

  • Yahoo! Finance User - Saturday, March 10, 2007, 10:17AM ET  Report Abuse

    • Overall: 2/5

    This article addresses parents giving financial help to their children. What about the other way around? My sister and I are thinking about buying my mother's house from her because my mother is having a hard time making ends meet. To add to her financial woes, her ex husband (not our father), who she was married to for about 2 years of the 20 she has lived in that house, is trying to force her to sell it or take it from her. My sister and I don't want to see my mother lose her home to a man with a chip on his shoulder. Does this article apply in reverse? I don't think it applies at all. Family should help family when it is needed in whatever way they can.

  • Chris - Saturday, March 10, 2007, 9:09AM ET  Report Abuse

    • Overall: 4/5

    Good post. Everyone needs to take evaluation of his or her own family dynamics. Parental help on a major milestone such as the purchase of the first home should be a non-risk situation. This is one case where professional consultation makes sense (especially if a spouse is involved). I have a friend that got burned (which in turned burned his mothers 'loan') in divorce.

  • Sweets - Saturday, March 10, 2007, 3:55AM ET  Report Abuse

    • Overall: 4/5

    Parent these days seem to be dealing with more and more children who "fail to launch". Part of this is because they allow their children to become financially irresponsible by catching them every time they fall a little bit off track. They need to let their kids grow up and take responsibility for themselves. Otherwise they will have nothing in their old age and they will have to work until they die. At that point the kids still can't take care of themselves and latch onto another family member or fall into the cracks of society and lead rather financially wrecked lives. This also leaves hard feelings from siblings who watch this child steal everything from the parents.

  • Yahoo! Finance User - Saturday, March 10, 2007, 3:01AM ET  Report Abuse

    • Overall: 2/5

    I realize borrowing from family can be problematic but this has not been my experience. I'm 23 and graduated from college last year. I borrowed money from my parents to pay for college and to buy a car. We've set up a payment plan for me to repay the money I owe. I haven't missed a payment yet. I don't abuse their trust and go buy expensive clothes or rack up huge credit card bills. Their support allowed me to focus on college when I was in school and only work 10-20 hours a week. I plan to use their financial support (again) when I buy a house later this year. In my case, I think (as do they) that it will actually work to my parents' advantage to lend me money for the down payment on a house. They aren't lending me the entire amount for the downpayment (I've saved about $17K of the $40K I'll put down). My parents want to retire in a couple years. I plan to pay them back at the same rate I get on the mortgage which will be a nice monthly payment for them in retirement (and at a better rate than they currently get from the bank). I don't think using their support means I couldn't do it on my own - their support saves me some money but also makes them some. I know how to save for big purchases - and if I wasn't putting 5% of my earning into a retirement account, I'd be banking even more money towards a house. All I'm doing is working together with my family - which will benefit me - and my parents.

  • Anju - Friday, March 9, 2007, 10:39PM ET  Report Abuse

    • Overall: 2/5

    I think it may be a cultural issue. In my culture, families work together and often live together. My parents will help me out financially when I am not making that much money, and I will take care of them later. Also, I think the financial situation is getting harder for young people. Education is more expensive than it was in the past, so many recent college graduates have a lot of debt to pay off. Many jobs require a graduate degree which is even more expensive. Starting salaries are often not enough to pay rent and loan payments.

  • Squeasel - Friday, March 9, 2007, 10:11PM ET  Report Abuse

    • Overall: 4/5

    I am a 23 yo civil engineer well on my way to an outstanding career and making a considerable amount of money, especially for someone my age. However, I still live at home, because I will not take money from my parents to make a down payment on a house or piece of property. I am not going on vacations, even though my parents offer to pay for everything. I have recently purchased 15 acres of land with my own money and negotiated the entire deal. This article is exactly right by saying "don't offer don't ask." I believe it is important for a young adult to gain financial savvy, independence, and education, something that is lacking among 95% of the people my age, and maybe of any age for that matter. Because when I begin to build my house, it will be mine and none of my parent's money was involved.

  • sunrise - Friday, March 9, 2007, 9:46PM ET  Report Abuse

    • Overall: 5/5

    environment change very quickly, if you don't help your child, he would miss and lose in this world. As a parent, help your child in the right moment and right way is quite necessary.

  • SandyP - Friday, March 9, 2007, 9:40PM ET  Report Abuse

    • Overall: 1/5

    This article is sponsored by some bank trying to get your money. If you are going to pay interest to someone who could possibly be better than your parents? They don't pay rent, they don't pay fat people to sit in chairs, they don't forclose on you unless you deserve it. Even better, you will probably even get that money back eventually. People who work together as a team always are better off. Your family can make for a great team. Get over your adolescent traumas and use what life has given to you to your advantage. And most importantly ignore industry brainwashing that appears as legitimate articles.

  • Michael D - Friday, March 9, 2007, 9:32PM ET  Report Abuse

    • Overall: 3/5

    Maybe I am bitter, because I had to grow up on my own, with little to no financial help from my parents, who barely scraped by at it was when I was a kid. I graduated from high school, worked my butt off full time while also going to University full time, paid my own way after graduation, and I was able to put my own down payment down. Help from parents? NONE. Int he end, however, I am a much more rounded individual, and I feel as though the things I own and the education I got is *mine*, deserved by *me* and worked for by *me*. No one else. That feels damn good. It would be prudent for even the most well-off parents to force their kids to make their own way.

  • Yahoo! Finance User - Friday, March 9, 2007, 9:25PM ET  Report Abuse

    • Overall: 4/5

    A parent should have the judgement to give a child the money or not. It is both the childs and parents fault if the child does not pay back. Once a kid who could talk perfectly well liveed with a deaf person. The kid didnt know how to speak after the test was over(2 years). The same way, the upbringing of the child really effects what they will do. I think it is better for parents to invest time, rather than money(though money should be given for schooling). Kids are normally good, and a parent should be able to judge if their kid is different. Giving a loan is very good. It is intrest-free and the child should pretend as if they are taking a loan from the bank. Think about it...if you could would you rather pay 200 dollars to a buisness or to someone you know? Same way, your parents can offer lesser intrest and stuff.

  • mac chic - Friday, March 9, 2007, 7:09PM ET  Report Abuse

    • Overall: 2/5

    I love that my husband and I were able to purchase our house without help of our parents. But, if the need was there, I know they would have helped us out. That's what parents are for. We never stop being parents. Just because we are grown, married , and out of the house, doesn't mean they stop being our parents. Of course, if you are the type of child that has never been responsible, or grateful, then I could see parents not helping their children. I know that when my son is grown, he can always count on us. My husband and I thought of those things before we decided to have children, they are our responsibility for the rest of our lives, we created them, and gave them life with God''s help. Why not be there for them in the time of need?

  • Yahoo! Finance User - Friday, March 9, 2007, 6:59PM ET  Report Abuse

    • Overall: 2/5

    I read this article and felt like i was watching a foreign film with subtitles that were about 2 frames off Huh? This is a concept that I just don't get. I had to run AWAY from home to go to college(thats the kind of family I had) worked full time to pay for that. I am living in a house that I had to purchase and am paying for myself, mean while i have a friend with 3 kids whose parents sent her to the finest private schools, top notch college and law school, she has not worked in 10 years and her parents have bought her a new car and pay ALL of her bills. While it would have been nice to have some help I think that there is a point with some people where it becomes crippling. All that I have is MINE..I have earned it and nothing is worth that feeling.

  • R - Friday, March 9, 2007, 6:20PM ET  Report Abuse

    • Overall: 5/5

    I just bought my house and both of my parents are deceased so I didn't have them to fall back on. It felt good coming up with the money for my house.

  • Nene - Friday, March 9, 2007, 6:14PM ET  Report Abuse

    • Overall: 1/5

    I never got money nor gifts from my parents.

  • JRT - Friday, March 9, 2007, 6:14PM ET  Report Abuse

    • Overall: 4/5

    I think kids of today expect parents to pay for things and this often continues into adult hood. My sister is in her mid 20s and I'm 5 years older. Her husbands parents make very good money and have helped him in the past and her as well so they paid for a majority of their wedding, gave some money for their house, I think around 10K, and recently bought a entry level Benz. So I think they are accustomed to having help. My situation is the complete opposite, the GF and I bought our second home at age 26 ($550K new house) because we bought a starter home and sold it at the peak of the boom, we ended up borrowing about $5K total from our parents but that was paid back in less than a year to each parent. When the GF and I get married we are paying for the wedding. We have no car debt, all three cars are paid off maybe a couple hundred dollars in credit card debt that gets paid off each month, save $300 a month in retirement, this is in addtion to retirement my job provides already, and already thinking about buying land to build our retirement home on. I think you deserve more credit if you can make it on your own without having mommy or daddy always helping you out financially.

  • Yahoo! Finance User - Friday, March 9, 2007, 6:14PM ET  Report Abuse

    • Overall: 5/5

    This article is excellent. The author points out a lot of valid points and exposes real life situaions that many Americans are oblivious to because they haven't exprienced them yet(especially with regard to elderly parents). To those who agree, congratulations, it seems that you have earned most of what you have and have worked hard for it. It DOES build character and teaches one to appreciate the things that 98% of the rest of the world does not have and you worked hard and honestly to obtain. To those who believe that everyone's parent's should support them for the rest of their lives, try making mom and dad proud and paying your own bills. It's not that hard, really. By trying this out, your parents may even still have some money saved up for when they are older and have to pay for treatments to deal with constant health problems. To parents who want to buy their kids a house, or give them a down payment on a house: Good for you. It's your money and your decision. Just start praying now that your kids can pay a few bills on their own when you are old and broke or are no longer around to keep bankrolling them.

  • James R - Friday, March 9, 2007, 6:13PM ET  Report Abuse

    • Overall: 4/5

    This is a great article. Parents should help their children with large purchases like a home. My parent couldn't wait to get me out of the house. I went to college and they told me when I got there that the plan changed and I would have to take the loans instead of them because they didn't want the debt. So, I get stuck with 20k debt and no job out of college only to have to move back home afterward and pay rent to them. All the time, I'm in college they are running all over the country on vacation. So they didn't save for my college, banked on me getting scholarships, piss away the equity intheir house and when they finally get it back. they bolt to FLA and tax a tax break leaving me up north with a mound of debt. that every mortgage broker looks at and immediately denies my chances for a home. A dollar for dollar match? What joke. My parents won't save and I can't save. They pay no state income tax and are remodeling their house. Yet I am foolishly squandering my money on things like education loans and CPA certification I can't even afford to look because no realter will look at me until I have pre-approval. Of course they owe me a loan to help. I'm not looking for a gift just a loan.

  • BEN - Friday, March 9, 2007, 6:13PM ET  Report Abuse

    • Overall: 1/5

    Where is the "pay it forward"? Not all baby boomers are so giving. I follow the baby boomers and have to pick up the pieces of poor financial decisions of my parents and my inlaws. They are self centered and whine about how they lost most of their retirement in wallstreet. BTW, they said I was grown at 18 and had to find my own way. I have lived without electricity or a phone because I didn't have the deposit available. I also wasn't eligible for grants for college because they made too much money - their income counted due to my age even though they had nothing financially to do with me going to college. According to the grandparents, when they were alive, my parents received help from them in early adult hood. I think that this article just helps to justify parents being able to not help out once again and to stay self centered.

  • rona b - Friday, March 9, 2007, 6:01PM ET  Report Abuse

    • Overall: 5/5

    It's a great article. My husband and I know many people who are in homes due to the family's generosity. (low rents, entire gift, ect) Do they appreciate it? Some do, others don't. Do I expect it from my mother? No. Her and my father worked for their first home and that's what we will do.

  • Jesse C - Friday, March 9, 2007, 6:00PM ET  Report Abuse

    • Overall: 5/5

    yea my parents are doing that to me and im pretty upset cause i pretty much gotta get out of my boyfriends house and they offered me the couch at their house.... and i have to stay there and live for at least 5 years and have rules like im 9 years old.... i know they made up all the rules cause they knew that then i wouldnt wanna move in the house..... its pretty upsetting,,,, i lost my job,,, then im on the verge of losing my boyfriend.... and then i lose my car... and then im about to loose it all

  • carolyn - Friday, March 9, 2007, 5:57PM ET  Report Abuse

    • Overall: 5/5

    Excellent article. This generation is becoming one who expects their parents' help. Each generation expects more and more from their parents. I am 64 and expected (and got) nothing from my parents. But it is a different story with my children. I believe their children will expect even more.

  • Steve - Friday, March 9, 2007, 5:54PM ET  Report Abuse

    • Overall: 1/5

    I guess it is better to pay interest to a bank than to keep the money in the family. With thinking like this, no wonder banks are poping up on every corner.

  • Bud M - Friday, March 9, 2007, 5:53PM ET  Report Abuse

    • Overall: 3/5

    There's one major point that rings true. "Meanwhile, realize that borrowing can quickly become an ugly family affair. Children who hit up parents for money should be prepared for the resentment of siblings who don't -- and potential squabbles over the parents' estate, experts say." I'm no expert, but I'm the executor of my dad's estate. He loaned in excess of $45,000 to a sibling over the last 10 years in two payments; of which the sibling paid back a total of $150 in those 10 years. This is someone who owns a business and blasts to Hawaii. My dad kept detailed notes on the loans and payments -- both of them, and notes to this sibling saying, "I need you to at least make an effort in paying back the loans." However, since there was no written agreement (contract) between my dad and my sibling, so there is under no legal obligation to repay the estate or have that amount taken from this sibling's share of the estate. This sibling received her full share, plus another $44,000 "gift" from the estate.

  • Yahoo! Finance User - Friday, March 9, 2007, 5:51PM ET  Report Abuse

    • Overall: 4/5

    Overall information is really good.

  • Yahoo! Finance User - Friday, March 9, 2007, 5:49PM ET  Report Abuse

    • Overall: 1/5

    parents are not a source to rely on? then who is your friend or your dog? i couldnt possibly imagine that saying no to your kids when they need a home or for whatever. this is not spending but a serious need. thats why maybe people need to THINK ahead when the kid grows up.. i mean, saying no for serious needs is just cruel. if that ever happens to be, i dont think i would ever speak to my parents again....

  • thor - Friday, March 9, 2007, 5:49PM ET  Report Abuse

    • Overall: 3/5

    If you invest the time and effort when your kids are little, to raise them to be responsible and self-reliant, then you can invest money in them when they are grown, with a quiet heart. Otherwise, beware. You're gonna reap what you sow.

  • tom - Friday, March 9, 2007, 5:47PM ET  Report Abuse

    • Overall: 4/5

    I think article is good caution for parents not to make children hopeless dependents, but rather responsible for their actions.

  • ChristopherF - Friday, March 9, 2007, 5:44PM ET  Report Abuse

    • Overall: 4/5

    As a child whose parents were overly protective, I can say firsthand it is not a good way to go. It is best for children to learn hard lessons about money, work, relationships before becoming adults.

  • Yahoo! Finance User - Friday, March 9, 2007, 5:43PM ET  Report Abuse

    • Overall: 1/5

    I have borrowed extra cash from my grandparents to help pay my rediculous mortgage in florida. 3 months later our house sold, I repaid my grandparents with interest, and now we are closer than ever before. Sometimes borrowing with honesty and respect is not such a bad thing. After all, isn't that what family is there for? To help...

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