Author Topic: No saving, parents give 200K to spend on downpayment for a house  (Read 4448 times)

blackomen

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This is a friend of a friend..  he's married with 1 kid and little/no savings (they basically live paycheck to paycheck.)  His parents give him 200K for a downpayment for a 400K house.  (But keep in mind there are almost no 200K houses in area and 400K is average.)  So he doesn't spend any of it and puts all 200K down for the 400K house.

I'm hoping his and his wife's jobs are secure.  Because if they are not, then they'll be losing their house and the 200K in home equity when this unlikely but devestating scenario could have easily been prevented.  Now there may be a family expectation to spend all 200K on the house but he could easily negotiate with his parents and inform them that he'd like to save a fraction of it as an emergency fund.  If I were in his shoes, I'd probably only put down maybe 100K and invest the other 100K but I'm aware probably not everyone is financially savvy enough to invest on their own.

ruthiegirl

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Re: No saving, parents give 200K to spend on downpayment for a house
« Reply #1 on: May 23, 2014, 01:46:13 PM »
It's not a horrible move really.  If he isn't a natural saver and is likely to spend the money, putting it all into a house isn't so bad.  It is invested and working for him and it will put a roof over his head at least. 

Of course, buying a $400,000 house with no safety makes my insides squeeze in panic, but not everyone has my need for a cash cushion. 

trailrated

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Re: No saving, parents give 200K to spend on downpayment for a house
« Reply #2 on: May 23, 2014, 01:51:28 PM »
Although most of us seem to enjoy being independent...I think if this person ever encountered a problem they could go back to mom and dad for some help.

totoro

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Re: No saving, parents give 200K to spend on downpayment for a house
« Reply #3 on: May 23, 2014, 02:42:04 PM »
Well, that is a generous gift.

How do you know their housing cost will not decline as a result of this move?  Do you know what they were paying for rent?  They are only going to be paying $935ish per month for the mortgage.

Why in the world would they lose all the equity? 

In Canada even if a house is sold in foreclosure you get the profit after sale and expenses.  Your down payment doesn't just disappear.  In addition you can borrow against equity to cover for an emergency by using a low-rate home equity line of credit.  Given that they have 50% equity they would be eligible for this where I live.  Is it different where you live?

All in all I don't see that as a terrible move.  Particularly if they are spenders.

blackomen

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Re: No saving, parents give 200K to spend on downpayment for a house
« Reply #4 on: May 23, 2014, 05:58:58 PM »
Well, that is a generous gift.

How do you know their housing cost will not decline as a result of this move?  Do you know what they were paying for rent?  They are only going to be paying $935ish per month for the mortgage.

Why in the world would they lose all the equity? 

In Canada even if a house is sold in foreclosure you get the profit after sale and expenses.  Your down payment doesn't just disappear.  In addition you can borrow against equity to cover for an emergency by using a low-rate home equity line of credit.  Given that they have 50% equity they would be eligible for this where I live.  Is it different where you live?

All in all I don't see that as a terrible move.  Particularly if they are spenders.

I guess I'm used to thinking in the worst case scenario but don't they lose all the equity if housing prices crash, the home gets foreclosed and sold for below what the equity is worth?

totoro

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Re: No saving, parents give 200K to spend on downpayment for a house
« Reply #5 on: May 23, 2014, 09:00:44 PM »
Who would ever buy a house if this was a normal occurrence? 

Houses have historically appreciated over the long-term at or above the rate of inflation where I live.  What about you?

Crashes and highs both tend to be temporary and very rarely reach a 50% reduction.  Has this occurred where you are already or are you predicting this?  If so, please set out your rationale as I find it difficult to understand.

With a $200,000 gift of a down payment on a $400,000 home I would expect that these folks will be doing just fine and this will springboard them forward in life significantly.  Even if they live paycheck to paycheck they have generous parents and can get a HELOC for emergencies.  And this purchase may end up saving them over renting by quite a bit.