Parents Could Rank High as Mortgage Lender

Parents are increasingly helping their adult children buy their first home. In fact, a new study suggests that if families were considered a financial institution, the “Bank of Mom and Dad” would be the seventh largest mortgage lender in the country.

Parents and grandparents supported the nationwide purchase of $317 billion worth of property—1.2 million homes—last year, according to a newly released study from the Legal & General Group, a multinational financial services institution.

One in five of buyers received gifts or interest-free loans from family members, the study shows. The average amount buyers received from them was $39,000. The Pacific region saw the greatest share of young adults receiving financial help in buying; the Rocky Mountain region saw the lowest.

More than half—51 percent—of prospective home buyers under the age of 35 say they expect to have help from their family or friends when buying a home. And young adults who already have purchased a home say that without the gift from the “Bank of Mom and Dad,” they would have had to delay their home purchase for at least three years.

“For many, perhaps most,young adults, buying a house without help is an increasingly unattainable goal,” says Nigel Wilson, chief executive at Legal & General Group. But Wilson calls it a worrisome trend that so many young adults are relying on help from family and friends to buy a home.

For example, family and friends who provide financial assistance may be putting their own finances in jeopardy to do so. For example, they reported taking out a loan (15 percent), raiding their 401(k) savings (8 percent), downsizing their own home (6 percent), or coming out of retirement (3 percent), the study showed. The study authors warn that too many of the younger generation may be dependent on their parents and grandparents to buy a home, even if it comes at a financial strain to the gift giver.

The Bank of Mom and Dad “reflects, first and foremost, a housing market where significant problems remain in matching the supply and demand of different types of housing, most notably starter homes and affordable housing of all kinds,” Wilson says. “As the population changes and the millennial generation strives to join the home owning democracy, new thinking is due on meeting the needs and aspirations of Americans.”