After saving for college, open a ‘first house’ bank account

Parents and their offspring conditioned to save for college should prep themselves to apply that discipline all over again. Only this time, the financial goal is longer term: the grown child’s first home.

Though the methods both sides use to reach this goal may differ, money experts agree the savers will need plenty of resolve and expert advice along the way.

The younger set will need to set priorities, develop a healthy discipline for saving and use of credit, and accept realities of the real estate marketplace.

For their parents, it will mean understanding gift and loan options.

“If the mind-set of parents and their children is to own a home, they need to be really disciplined about it and know all their options,” said Gwen Thomas of Bank of America. “It’s doable. It just takes some forward thinking.”

The best first step for young people is simply to adopt a diligent savings habit. Financial pros such as Thomas say squirreling away money can be done without crimping youthful lifestyles. Thomas recommends automatic payroll deductions funneled into an account separate from daily checking or savings.

Worth remembering for home-owning wannabes is that their past -- particularly credit card use -- affects their real estate future. Indiscriminate use of credit cards during freewheeling college years can tarnish credit reports. Still, Thomas said, responsible credit card use “is a good way to build credit.”

A spotty credit history can affect both the type of home loan and interest rate. Her counsel: Use only a few cards and pay at least the minimum balances. Even if debt is carried on a card, those payments help to build credit.

Although no one knows for certain how many parents contribute to the purchase of a home, what is clear is that parents have lots of ways to provide assistance.

Among other options, parents can lend money, make outright gifts or co-own the home with their child.

Parental loans can be below market rates, but there’s a catch. Thomas said for young borrowers to deduct the loan interest for tax purposes, a promissory note outlining repayment terms is necessary along with a deed of trust filed with local governments in favor of the parents. The interest income parents receive is taxable income.

Another loan scenario has the parents lending partial payment, 50% for example, and their children securing the balance of the purchase as a mortgage loan from a bank.

Then there are gifts. Each parent can give up to $11,000 per year. Those funds can be used for the down payment or as a way to forgive a purchase loan.

More complex is a shared ownership arrangement. There are a number of complications involved, including percentage of title ownership, joint tenancy and tax implications, to name a few.

But the biggest role of parents may be as advocates for homeownership itself.

“As the senior influencers in the life of their children, it’s up to the parents to emphasize owning a home as a way to build wealth,” Thomas said. “The concern will shift from getting through college to getting a firm real estate foothold.”

Thomas pointed out that the guideline of a 20% or more down payment is old school.

“Get it out of your head that you need to save enough for a 20% down payment,” Thomas said.

Today’s borrowers can explore programs that require zero down payment or as little as 3% to 5% down payments.