Why Gift a Down Payment?
Homeownership is widely regarded as a cornerstone of wealth building. Gifting a down payment to your child can catapult them into the realm of equity and property ownership, laying a sturdy foundation for their financial future. Chaim Geller, CEO of HelpMeBuildCredit.com, affirms, “Gifting a down payment can be a very smart thing to do that benefits your kid for the rest of their life.” It’s a predictable and sustainable way to support your child without entangling your credit for three decades, the typical mortgage repayment term.
In today's challenging real estate market, where high rents and student debts burden the aspirations of many young adults, gifting a down payment to your child might seem like a beacon of hope. Indeed, the National Association of Realtors reported that 22% of first-time homebuyers in 2022 utilized gift funds from family or friends for their down payment. For those under 30, that number increases dramatically to 40% according to a recent study by Redfin.
Gifted funds for a down payment are generally well-received by mortgage lenders, but legitimate sourcing is crucial. The gift should be made directly to your child at least two months before they apply for a mortgage. This seasoning period ensures the money appears in multiple bank statements, validating its legitimacy in the eyes of lenders.
The Gift Tax Consideration
One of the significant concerns for parents contemplating a down payment gift is the fear of triggering the gift tax. In 2023, you and your spouse can each gift your child up to $17,000, totaling $34,000, without incurring the gift tax. Moreover, there's a substantial federal lifetime exemption of $12.92 million, making gift taxes little concern for most families if gifts are made over a period of time. With Foyer, setting aside savings towards a child's future down payment can be done annually and may even be tax deductible up to $10,000 per year in certain states like Michigan. Nonetheless, it’s wise to consult with a tax professional to understand the specific implications for your situation.
Navigating the Process with Care
Making the decision to gift a down payment requires planning and open communication with your child. Here are some steps to consider:
1. Evaluate Your Finances: Avoid impulsive decisions; carefully assess your financial situation to ensure you can afford the gift without jeopardizing your own stability.
2. Timely Gift: Transfer the funds to your child's account at least two months before their mortgage application. This time frame allows the money to season, making it a legitimate part of their assets.
3. Draft a Gift Letter: Compose a down payment gift letter for your child’s lender. Include your name, your spouse’s name (if applicable), contact information, gift amount, and the intended purpose of the gift. Supplement the letter with account statements proving the fund transfer. This is often required by the mortgage lender to ensure that funds are properly accounted for if the gift is made closer to the purchase date.
While gifting a down payment is a generous gesture, it's not the only option. You can consider other avenues such as co-signing the mortgage, becoming a co-borrower, assisting in the home search, or even renting a room to your child at a discount. Some families even provide a private loan to their loved ones. This may come with it's own complications depending on the loan terms. Each option comes with its unique set of advantages and challenges, making it crucial to weigh the pros and cons carefully. In the end, the decision to gift a down payment is not just a financial transaction; it's an investment in the future of the next generation when homeownership has never been more difficult for young Americans.