The Carr Report: Should adult children living at home pay rent?

by Damon Carr, For New Pittsburgh Courier

Damon, I saw this video online about requiring adult children who work but still live at home to pay rent. It got me to thinking:

Should they chip in and pay rent or a bill or two? Should they at least keep the main parts of the home clean if they’re unable to pay? Do you think it’s ok for adult children to work, live at home and not contribute? Or should you just put an ultimatum on them to move out, regardless of any contributions they offer?

~ Christina

Damon says:

Kids can’t wait to be grown until it’s time to start “adulting”. I define “adulting” as working, being responsible to take care of both yourself and your responsibilities, and being able to pay your own bills. When the Bank of Mom and Dad closes and your children realize how expensive the cost of daily life is—it’s that exact moment they begin to appreciate the hard work and sacrifice of mom and dad.

I think it’s perfectly ok for a child to stay home while they continue to work towards becoming self-sufficient. The key point being they’re working toward becoming a better, more productive version of themselves—be it school or be it working a part-time job or entry level job until they find a job that will pay them enough to afford living on his or her own.

As far as help towards bills.  Every household financial predicament is different.  Some parents, particularly single parent households, are struggling to get by. So the child being able to help with money and help with household expenses ease the burden of the parent.

Some parents are in a good financial predicament especially since they no longer have to provide for the adult child. They don’t need help from the child.  The primary goal of these parents will be ensuring their adult child understands the importance of sound money management including earning a decent income, budgeting, saving, investing, and making good decisions with their money.

Some parents charge the adult child rent.  But when the child is ready to move, the child learns that the parents saved the rent payments for the benefit of the adult child. The parents give the money saved to the adult child to help them as they move into their new life full of new responsibilities. This money will be a huge help.

Let’s not forget about that adult child who simply failed to launch. They’re not driven. They’re ok with the idea of sleeping in their parents basement. You have to enforce tough love. They should be required to get a job, pay rent and have a plan on moving out within a certain time frame. It’s up to the parents to determine that time frame. 

Yes! All people over the age of 5 living in the hive should be able to contribute towards keeping the house clean.

*****

Are there programs out there that pay your down payment for you to purchase a home?

~Christina

Damon says:

FHA—Federal Housing Administration allows you to purchase a home with as little as 3.5 percent plus closing cost. Practically all first time homebuyer programs offered are FHA Loans because of the low down payment requirement. In addition to low down payment, they’re more lenient on credit scores than Conventional Loans. You can get an FHA Loan with a credit score as low as 580. Lastly, FHA Loans also allows for higher debt to income requirements.

If you’re an eligible Veteran, you can do a VA loan guaranteed by The Department of Veteran Affairs. These loans have Zero down payment requirements. As you can imagine most veterans go this route.

Then there’s Conventional Loans insured  by Fannie Mae and Freddie Mac. Under this program, you can purchase a home with down payment requirements as low as 3 percent down. Conventional Loans are more conservative when it comes to credit scores and debt to income ratios. 

Now here’s what’s instructive, studies have revealed, the less a person puts down on a house and the higher the debt to income ratio tolerance the higher the default rate. Both FHA Loans and VA loans have a higher default rate then Conventional Loans.

Down payment assistance programs come in many flavors. Usually you have to be in a certain income bracket to qualify. Programs are generally geared towards lower income households.

Many of these programs come with a lien against your home. You’re required to stay in your home for A certain number of years. If you sell or refinance before then, you have to pay off the lien.

Here’s what I recommend: Get your financial house in order first, then seek homeownership. Strive to put down 10 percent minimum. Purchase price on your home should not exceed 3X your annual gross salary. Meaning, if your annual salary is $70,000, Purchase price should not exceed $210,000. Payments on your mortgage should not exceed more than 30 percent of your take home pay. Taking on housing payments more than this will limit your ability to accomplish other financial goals. Do fix rate, 15-year mortgage. Never take on a mortgage greater than 20-years.

*****

 

Damon, I have a few more questions because I’m currently looking to buy a house.

How are early payoffs? I keep hearing about stiff penalties. I thought a 30 year would be dope if we could pay it off in 10, because it gives us the comfort of knowing our payments can be small in those tight times when business slows down. But will that inevitably be more costly in the end?

Is there an upside working with a Buyer’s Agent vs just house hunting on our own?

~Christina

Damon says:

Prepayment Penalties – meaning if you pay loan off in first 3-years you pay an extra fee, it was big in the subprime mortgage market. That market collapsed. There are few loans if any that has a prepayment penalty on them today

Very few people who take out 30-year loans make the extra payments to pay off the mortgage sooner than 30-years. They make the minimum payment. Interest on mortgages are front loaded – meaning in the first 15-years on a 30-year mortgage, 90 percent of your payment goes to interest. This is why I recommend 15 or 20-year terms. Shorter terms allow you to build up equity faster.

Real Estate Agents have access to the Multi Listing Database. They’re generally more than likely able to find a house of your liking faster than you. Lastly, the Seller pays the fee for both Selling Agent and Buyers agent. Buyer’s Agent is essentially free service to the buyer.

(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website at www.damonmoneycoach.com)

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