I want to help my daughter and her husband with the down payment for their first home. What ’s the smartest way for me to do so without hurting my own finances?
Stuart Imber – Residential Mortgage Banker, Delmar Financial Co.
It’s natural for parents to want to help their children, and education and home purchases are probably the most common areas. Before giving money for a down payment, however, parents should consider the paperwork requirements and tax implications.
Mortgage lenders typically allow gifts from relatives on down payments for an owner-occupied residence (not an investment property). The simplest way to give money to your child is to write her a check. To avoid a pile of paperwork, however, you’ll need to plan ahead. The federal government requires lenders to ‘source’ funds used for down payments. To avoid extra scrutiny, your gifted (or loaned) money needs to sit in your child’s bank account for a period of time before closing. Most mortgage lenders want to see two months of bank statements with it included.
Funds that aren’t in a child’s account long enough, or are turned over by the parent to the lender at closing, must be reviewed. The parents will need to provide a gift letter and bank statements proving where the money originated.
Before handing over down payment dollars, consult an accountant. Find out whether your cash gift can be given tax free because any tax burden will be yours, not your child’s. Also, parents should keep in mind that once the gift is given, it’s permanent. It puts the money directly in the child’s hands to make a purchase on a house, and there’s no control left on the asset because a gift is irrevocable.
Jane M. Miller – Assistant Vice President, Midland States Bank
The best way to assist your children with the down payment for their home is first to offer a bit of parental financial guidance. Have them do some homework on the various loan programs; conventional, FHA, VA and USDA require different down payments. There are myriad ways to structure mortgages, such as loan amount, affordable monthly payment, terms, rates and settlement costs. While minimum down payment mortgages exist, keep in mind that with 20 percent down mortgages, no private mortgage insurance (PMI) is required, so the savings would be greater. It may also put the buyers into a higher sales price range, as their monthly payment will be lower.
Depending on the size, gifts are generally allowable on most loan programs. A gift letter and other documentation are required to prove the sourcing and the receipt of the gift funds. Go ahead and decide the amount you’re willing to provide your child, but don’t transfer funds until your child speaks to a mortgage expert who can explain exactly how and when to initiate the transfer process.
By doing initial research and consulting with a mortgage expert, the home buying process can be easier and more stress-free. Also, getting pre-approved for a loan will provide your child the purchasing power to make informed decisions and choose the loan that best suits their qualifications and financial goals. Interest rates are historically low, so if your gift can help move your child into a home sooner than if she saved her own money, life is good!
