Giving your kids down payment money…

It is a quite natural thigs to want to help our your children get started in their lives and giving them the money to make a down payment on their first house (if you have the financial ability to do that) may be a great way to help; but you need to be aware of a few things.

Your son or daughter will need to check with the mortgage company that they’ve chosen to see what their rules are about “gifted” money. Certain mortgage types or companies don’t allow gifted money as part of the down payment. Almost all companies will require that you write a letter explaining where the money came from and stating that the money is a gift and that you do not expect them to pay it back. Otherwise, the gift is considered a loan and will affect their credit worthiness. Most mortgage companies will have guideline about the amount and in what timeframe such a gift may be made.

Mortgage underwriters are very suspicious types (it is unfortunate that they have to be, but it is a reality in today’s world). If possible, make the gift a couple of months before your child is planning on using it and have them hold it in their account, perhaps in a linked savings account. Money that has been sitting in your child’s account for 3-4 months is considered to be “seasoned money” and provides proof that it is not expected to be paid back. Mortgage underwriters really don’t like to see large, last minute deposits in the client’s account, even if you have a gifting letter. Many mortgage companies will not require a gifting letter if they see “seasoned money” sitting in the borrowers account.

Understand the tax rules concerning your gift. Determine whether you or your child will need to pay taxes on the gift. The annual gift exclusion amount for 2021 stays the same at $15,000 per donor, per recipient. Each individual can give away $15,000 to any individual they desire with no federal gift tax consequences. Married couples can combine these amounts and make $30,000 gifts to each individual, doubling the impact. The child receiving the gift doesn’t have to pay taxes on it. You should consult with your tax person on any gift above the limits to see what your tax liability might be.

Make sure that your child has the other money that will be required to close the sale. The down payment is usually the biggest chunk of the costs to close the sale; however, there are other pre-closing costs that can add up quickly.  Those  costs include  the home inspection, the appraisal and other fees that the mortgage company will charge ahead of the closing, the homeowners’ insurance for the first year and establishment of an escrow for taxes. Some of those costs may be rolled into the mortgage, but figure on at least a couple of thousand dollars to cover these costs. A child who is unable to cover these costs, in addition to needing your help with the down payment, may really not be ready to become a homeowner. They may need your advice more than your money.

So, it is a little more complicated than just writing out a check to your son or daughter. Consider the effort to make sure of all of these requirements to be part of the gift. It is still a great way to help them get a good start on their lives out of your house and into their own home.

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