Many good comments here, and scaredy brought up the most important issues WRT making a home loan to a kid: divorce, and “favoritism” in the event the kids and purchasing circumstances are not the same.
In my family, we’ve made multiple loans back-and-forth, including multiple mortgages. (even kids to parents, if the parents’ money was tied up in other investments). ALL loans — whether for a mortgage, car, short-term, long-term, etc. — were documented and carried interest from the time we were legally allowed to work (15 years old).
That being said, not all parents/kids should be involved in these deals, and I would not make a large or long-term loan to a child if they haven’t proven, over time, the ability and willingness to ALWAYS pay back loans **with interest,** no matter their personal circumstances. In the deals between myself and my parents, these deals always worked out VERY well for everyone — the lender got a higher rate than on savings accounts or other similar investments, and the borrower paid a lower rate than what would be offered by a traditional lender. We always documented everything, and everyone understood the consequences of default, etc. It was very much a business transaction, and personal issues were not allowed to get in the way.
I’ve known of a few of these deals in other families that did NOT work out, though. In most cases, it was because the kids bought houses at bubble peaks (in the late 80s and also the most recent bubble), and they walked away from their homes and mortgages. If not for the incredible ability to forgive on the part of the parents/grandparents (not sure I could do the same in these cases), these relationships probably would have been lost. In one case, a divorce was also involved in the default.
