Should You Borrow Money From Relatives to Buy Your First Home?

For today’s topic, we’re going to discuss whether borrowing money from a relative to purchase your first home is a wise move.

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Especially for younger buyers, having the financial wherewithal to purchase their first home comes with its challenges. With home prices continuing to mount, breaking into the market for the first time can be difficult.

If you’re one of these first-time buyers, how can you get into a home?

The obvious answer is to borrow money from a relative, but it’s important to recognize the good, the bad, and the ugly associated with this course of action.

Let’s first consider the good. It could be that your parents or grandparents have set aside funds with the express intent of helping you get into your first home, giving you a leg up. There’s no real downside to this because your relative saved money for that very reason.

Alternatively, if you’ve established a retirement plan such as a Roth IRA or the like, you can borrow from that account to pay for a home without penalty. Check with an accountant or a professional who’s familiar with your situation beforehand, though.

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It’s important to recognize the good, the bad, and the ugly associated with this course of action.

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Now, I’d like to share a brief example that’s representative of the bad (plus the ugly): About four years ago, I happily assisted one of my clients in her home sale, from which she extracted $75,000 to $100,000 in equity.

I recently learned that, with that money, she helped her children get into their first home. By doing so, however, she exhausted all of that money. What’s worse, she didn’t have a retirement plan in place. Because her children couldn’t return the favor financially speaking, she’s now stuck with little money to live on month to month.

Therein lies the problem with relatives lending money to children or grandchildren in order for them to buy a home. Without having a keen awareness of what it means for their financial future, some people, unfortunately, give in to emotion and pass along money that’s vital to their own livelihood to their children or grandchildren.

A word of advice: Think twice before borrowing funds from a relative for your home purchase. If you do borrow from them, make sure you’re borrowing surplus funds that don’t eat into their own retirement system. 

If you have any questions about today’s topic or anything else real estate-related, feel free to give me a call at 541-554-5825 or email me at GaryRaze@Remax.net. I’d be happy to help!