Using a Home Equity Loan to Help Your Kids Buy Their First Home

By Rae Hartley Beck
Updated January 18, 2023
Reviewed by
Doretha Clemon
Doretha
Reviewed by Doretha Clemon
Full Bio
Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder.
Learn about our Financial Review Board
Fact checked by
Suzanne Kvilhaug
Suzanne Kvilhaug
Fact checked by Suzanne Kvilhaug
Full Bio
Suzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Learn about our editorial policies

The American dream of homeownership is quickly moving out of reach for many, with 22% of millennials surveyed by rental listings site Apartment List saying that they expect to rent forever. For those who do hope to buy a home, nearly two-thirds reported having no funds for a down payment.

If you’re looking for ways to help your kids purchase their first home, leveraging the equity that you have in your home through a home equity loan may be a way to do it.

Key Takeaways

  • Make sure that you can pay back a home equity loan before risking your home for the sake of helping your kids buy one.
  • With home equity loan proceeds, you can give them cash for a down payment or help pay down their debt and help them get approved for a loan.
  • Keep gift taxes in mind when gifting your loan proceeds to your children.

Use a Home Equity Loan to Help Kids Buy a Home

Before taking out a home equity loan to help your kids buy their first home, consider the rest of the assets that you may have available. If you have other assets such as investment properties, cash savings, or retirement accounts, sit down with a financial planner to see which is the best to pull from for this purpose.

You may find that selling an investment property or allowing your kids to live there for reduced or zero rent may be a better option than taking out a home equity loan, especially under economic conditions with high-interest rates. A home equity loan requires a minimum of 10% equity in your home, good credit, and proof of income sufficient to pay back the loan.

Once you are approved for the loan, the cash is yours to do as you see fit. Keep in mind that you’ll be making fixed monthly payments, including interest on the amount borrowed for the length of the loan. If you’re 10 years from retirement, make sure that you can still afford to make loan payments after your retirement, or get a home equity loan with a shorter loan term.

Cash for a Down Payment

Giving your kids cash for a down payment may be the easiest way to help them buy a home, but it may not be enough. Gift taxes limit your cash after the first $16,000 per recipient per year in 2022 and $17,000 for 2023.

If you and your spouse each give $17,000 to your child in 2023 for a total of $34,000, that can provide them with a 20% down payment on a home of up to $170,000. That may sound sufficient, but in 2022, the nationwide median home price was $428,700.

Married Couples and Gifting

Even if you file a joint tax return, each spouse can gift up to the gift tax limit. This means that you and your spouse can each gift $17,000 to your child, a total of $34,000 in 2023.

If your kids are only putting 3.5% down through a Federal Housing Administration (FHA) loan, they could potentially purchase a house worth approximately $971,000 with a $34,000 down payment.

However, FHA loans carry additional costs, most notably the large up-front and annual mortgage insurance premiums that stay on for the life of the loan. In hot real estate markets, some home sellers are hesitant about accepting FHA offers if a non-FHA offer is available, as FHA loans have stringent appraisal and inspection requirements.

Help Paying Down Debt

One of the factors preventing your children from buying a home may be their debt-to-income (DTI) ratio. Student loan debt reached a record $1.745 trillion in 2022. If your kids have large student loan payments, it may be hard for them to get approved for a mortgage. Most lenders prefer a DTI of 36% or less, which can be difficult for recent graduates to attain with current college costs and entry-level salaries.

If you help your kids pay off their student loans with the proceeds from a home equity loan, you can help them get approved for a mortgage. However, keep in mind that gift tax rules may still apply.

What Are the Risks of a Home Equity Loan?

There are two main risks with a home equity loan:

  • That you could default on your loan and lose your home if you can’t afford to pay it back
  • That you could become underwater on your loans if your home’s value decreases, making you unable to sell your home without a significant financial loss.

Can I Co-Sign My Child’s Mortgage?

Yes, you can co-sign your adult child’s mortgage, which can help them get approved for a loan if their income or credit score is insufficient or if they have too much debt. Keep in mind that you’re on the hook for the mortgage if something happens and your child becomes unable to pay it back. Co-signing will also affect your debt-to-income (DTI) ratio, which can affect your future ability to be approved for things like a mortgage or an auto loan.

Who Pays Gift Taxes?

Generally, the giver pays the gift tax to the Internal Revenue Service (IRS), but there are some circumstances where the receiver can make arrangements to pay the gift tax. Check with a tax professional to see what is possible and the best for your situation.

The Bottom Line

If you’re willing to take on more debt to help your kids achieve homeownership, taking out a home equity loan may be a way to do it. You can use your home equity loan proceeds any way you like, but helping with a down payment or helping them to pay down debt that may be affecting their mortgage approval is the most effective way to help them buy their first home.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Aparment List. "Apartment List's 2022 Millennial Homeownership Report."

  2. Apartment List. “Apartment List’s 2021 Millennial Homeownership Report.”

  3. Discover, Home Loans. “What Loan to Value Ratio Means for Home Equity Loans.”

  4. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”

  5. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2023."

  6. Internal Revenue Service. “Frequently Asked Questions on Gift Taxes,”

  7. Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis. “Median Sales Price of Houses Sold for the United States (MSPUS).”

  8. U.S. Department of Housing and Urban Development. “Let FHA Loans Help You.”

  9. U.S. Department of Housing and Urban Development. “FHA Mortgage Limits: Maximum Mortgage Limits 2022.”

  10. U.S. Department of Housing and Urban Development. “Appendix 1.0 — Mortgage Insurance Premiums,” Page 1.

  11. Federal Housing Administration, via U.S. Department of Housing and Urban Development. “FHA Single Family Housing Policy Handbook: IV. Appraiser and Property Requirements for Title II Forward and Reverse Mortgages,” Page 3–4.

  12. Education Data Initiative. “Student Loan Debt Statistics.”

  13. Cornell Law School, Legal Information Institute. “Debt-to-Income Ratio.”

  14. Consumer Financial Protection Bureau. “A Friend Asked Me to Be a Co-Signer on a Mortgage Loan. What Does That Mean?”

  15. Internal Revenue Service. “Frequently Asked Questions on Gift Taxes."