Your kids have been wonderful to you. Not much trouble, always did their chores and never fought. Much. But now they're all grown up and are ready to take the next big step, buying a home. And they need your help.

There are two basic ways to help your kids: Give them money or co-sign their mortgage. Let's look at both options.

Giving a financial gift really requires just a little due diligence on everyone's part, but the typical requirements are that the gift comes from a family member, and not someone outside the clan. The reasoning behind this is that a family member is more likely to "give" funds while strangers give what usually turns out to be a "loan." A loan is a debt that must be repaid, and a loan with monthly payments can affect the borrower's debt ratios and ability to repay their mortgage on time.

Another qualification for giving gifts is that the borrowers need to have at least funds saved up from their own accounts, usually anywhere from 3- to 5-percent of the purchase price. If the new home costs $100,000 the borrowers will need to document that they have $3,000 to $5,000 saved up in an account that they've had for a while. These funds can be used for the down payment money or closing costs, but they'll still need to be verified for most conventional and government loans. One side note -- if the gift represents 20 percent of the sales price, the borrowers typically need to have nothing at all in terms of money in the bank.

One last item regarding gifts, the lender would like to see a signed Gift Affidavit. This form is signed by the family member giving the money stating that they have the ability to give these funds and are giving the money with no expectations of getting it back. In other words, it's not a loan. Most parents however are more than used to this arrangement.

Another way parents can help is to co-sign on the mortgage. Here, you agree that if the home buyers default on their mortgage you agree to make the payments on time. This is no big deal either, but there are a couple of things you need to know.

First, even though you co-sign on the mortgage to help qualify, the buyers will still need to have debt ratios within certain parameters. Sometimes this means that even though a lender will use your income to help qualify, the lender also wants to see a reasonable debt load on the primary home buyer as well. The lender doesn't want to call you every month collecting mortgage money.

Second, remember that the mortgage you co-signed for will appear on your credit report, and may be counted against you when you apply for future credit.

Some lenders will waive a co-signed debt when considering a loan application from you, but only if you can provide canceled checks from the primary borrowers from the twelve months. In other words, show that you haven't had to step in to make the payment.

There can be opportunities to provide children with up to $10,000 from retirement funds. The rules here -- and with other big gifts -- can be complex, so speak with a tax adviser before making a withdrawal.

So there you go, when the kids call for help. Just say "yes" -- but before you do make sure you're aware of all the implications.

For more articles by David Reed, please press here.

Published: June 8, 2001

Use of this article without permission is a violation of federal copyright laws.

, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.