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by Adam Bulger
November 01, 2019
by Adam Bulger
November 01, 2019
You've never felt more like an adult. Your career's flourishing and your family's growing. People take you seriously as a professional and a parent. After thinking hard about your future, you're sure that you're ready to buy a house. Unfortunately, to take that step, you have to do something you left behind from your childhood: dial up mom and dad and ask them for a loan.
Sound familiar? Asking for a loan from one's parents is becoming more and more of a reality for modern adults. Parents are now the seventh-largest home loan lender in the U.S. In fact, a study from Legal & General Group found that the money parents lent adult children helped buy 1.2 million homes in 2018. That money helped fund the purchase of $317 billion worth of housing.
The reasons Millennials (43% of those mentioned in the study above are under the age of 34) are turning to mom and dad to take major life steps are obvious: student loan debt, stagnant wages, the high cost of childcare, and a general uneasiness about the future. If mom and dad are liquid enough, they're a better lender than the bank.
But even if all parties involved are okay with the arrangement, money changing hands can change relationships.
"It can feel humiliating to go back and ask for help," says Tracy Beveridge, a New Jersey accountant with decades of experience advising families and businesses. "It feels like you're five years old again."
While asking your parents for a gift or a loan may seem insurmountably awkward, there's good news. You're a rational adult and you're capable of sophisticated methods of persuasion, and acting like a grown-up among other grown-ups can smooth out a lot of the awkwardness.
Admittedly, though, there are good reasons to dread turning your parents for financial assistance. San Francisco Bay-area wealth advisor Brent Thomas cautions against relying on parents unless it's unavoidable. Mom and dad may have less money than you think. "Many times parents are really not in a position to loan money to their children as much as their children think they are," he says.
After decades of doling out money for schools, sports uniforms and equipment, band instruments, clothes, transportation, Invisalign braces. and whatnot, parents might have little left after their prime earning years. Once they're on a fixed income, their cash reserves might be dwindling. As a result, helping their kids today could jeopardize the family's future tomorrow.
"Now they can't pay for their own retirement, they can't pay for their own mortgage, whatever those things are," Thomas says. "It sort of sets in motion a really negative scenario."
If you're confident your parents can afford the help you need, the best plan is to go big once and don't ask again, and to have a very specific idea of what you need. "It's better to ask for $10,000 today than to keep coming back and saying 'can I have $200, can I have $500,'" Beveridge says. "That way you only have to dirty your face once."
Specificity helps these conversations. Parents will almost certainly rather pitch in for an asset that benefits you over the long term, such as a house or a car. They'll feel good about investing in a responsible person who's building a future as opposed to enabling a spendthrift flake who can't handle their finances.
Asking for a big sum is daunting. It's tempting to avoid doing it in person. But you're not a college kid who's blown through money that should've lasted a semester. A Venmo request won't cut it. You have to look your parents in the eye.
"If you are going to ask for money that needs to be a personal one-on-one conversation as opposed to shooting them a text," Thomas said.
This is where your adulthood becomes your biggest asset. Draw on your professional experience. Forget that these people remember every embarrassing moment from your childhood. Treat the conversation like you're making a presentation to potential stakeholders in a business meeting.
Are you asking for mortgage help? OK, when do you expect them to get their share back? Do you have plans to sell and will the market value of the home be higher? Show your work. Give them numbers. Draw up a repayment plan. Be as transparent as possible.
This work will not only prove to your parents that you see this transaction as a business matter and also work to mitigate any shame that might bubble up from the asking.
If you're nervous about approaching your parents for money, consider asking them for other kinds of help. Get them involved early in your house search. Lay out your finances and research and say you want their advice.
"You can be honest and say you need to get $20,000 from some source to make up for the down payment and you don't have yet," Thomas says. "And then it can be a conversation about how that means you either live in an apartment for another two years or you find someplace to borrow it from."
The conversation can help you gauge their interest in helping out with money. And it gives parents a chance to volunteer their intention to help; you might never have to ask them at all.
"That gives a family member an opportunity to say, 'well, you know, rather than paying rent, I wouldn't mind loaning you $20,000 to help you get your down payment together,'" Thomas said.
And if you ask and they say no, it can hurt. Still, you've got to accept it and move on. "There can be a lot of reasons why they would say no, and you need to be very respectful of that," Thomas said. "There may be reasons behind the scenes that you are completely unaware of and simply won't be aware of as to why they won't do it."
If they say yes, understand that your privacy is on the line. They will likely pry and be more invested in your purchase than they would have been previously. This is their right and it's in your best interest to talk about these matters upfront as well: how will you keep them informed? What does a check-in look like? Because while the Bank of Mom and Dad might not have a high APR, a loan from them comes with other fine print.