If your adult child is hoping to buy a home but is struggling to come up with the down payment, one way you might be able to help is by paying for the down payment. But is it the best option for your family’s situation?
Advantages of Gifting
- Reduces Payment Amount. Gifting a larger down payment means the recipient is borrowing less, which can lead to lower monthly payments and even better loan terms.
- Avoids Private Mortgage Insurance (PMI). A down payment of 20% or more may eliminate the need for PMI, saving the buyer significant costs over time.
- No Repayment Required. Since a down payment gift doesn’t have strings attached like co-signing on a loan, it reduces the potential for financial strain on relationships.
Disadvantages of Gifting
- Financial Risk. Once the money is gifted, you no longer have access to the funds.
- Financial Readiness. Down payment is just one of the costs of homeownership. If the recipient is not fully prepared to cover the other costs including maintenance, property taxes, and insurance, the gifted down payment may not be the help you think it is.
- Mortgage Qualification. If the gift isn’t documented correctly or appears as a loan, it could complicate or derail the mortgage approval process.
How to Gift Properly
Before you do so, it helps to know what you’re getting into. Here are some things to know about gifting a down payment properly.
Understand the Tax Implications
You can avoid filing a gift tax return for gifts up to $18,000 per person. If your gift exceeds $18,000, you will need to file an IRS form. Talk with a tax advisor about details, limits, etc.
Comply with Lender Requirements
Each mortgage lender has procedures, documentation, and forms for gifting funds.
- Ensure that the gift recipient notifies the lender early in the process that there will be gifted funds for some or all of the down payment.
- Follow the necessary lender requirements for gifting down payment dollars.
Make it Official
Most mortgage lenders will require a “gift letter” from you before allowing the funds to be sent. This official document will help cover you as well. Here is what is usually required in a gift letter:
- The child’s name
- Their relationship to you
- Their personal information, like their address and phone number
- The amount of your gift
- Written confirmation that the money does not need to be repaid
Transfer Money Transparently
The best way to gift a down payment is directly and transparently:
- Wire the money to the title company, which will then put it in escrow.
- Send the money straight to your child. Although this is less than fully-transparent.
- Avoid giving checks or cash that can’t be easily documented.
Keep Documents
To ensure transparency, both you and the recipient should have documentation of the gifting process, including:
- Physical and digital copies of the gift letter and lender forms.
- Bank statements of the withdrawal and deposit.
- Correspondence (email, letters, text messages) with the lender, title company, and recipient in regards to the gift.
Make sure to follow the processes correctly so the gift is a positive financial experience for all parties.
Not sure if this is the right option for your family? The mortgage loan officers at SESLOC Credit Union can help you evaluate all your options and determine the best way to help your family open the door of their next home. Contact us today to get the conversation started.