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Your Guide to Receiving a Gift as a Down Payment

What you need to consider before your family helps you purchase a home.
Nicholas Garcia
Nicholas Garcia Senior Financial Planning Associate 4 min read
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There are numerous benefits of making the transition from renting to owning a home, but for many first-time home buyers there is often one major hurdle: the down payment. This is particularly true in some of the largest cities, where competition from other buyers and high sale prices demand a prohibitively large down payment. For this reason, it’s not uncommon for parents, grandparents and other family members to help new buyers make the leap to home ownership.

Here are three of the most common strategies for those looking to help family members get their foot in the door, each with its own advantages and caveats.

Cash gift

How it works: The most common approach, by far, is for parents or other family members to gift money for the down payment. This simplifies the rest of the process, as it doesn’t require the benefactor to be on the mortgage or draw up additional paperwork. Any individual can gift another person up to $15,000 a year without having to pay a gift tax — which can be as high as 40% — or file a gift tax return. That means a couple could give another couple as much as $60,000 in any one calendar year; it’s not uncommon for parents to make this maximum gift over two calendar years.

What many buyers and their parents don’t realize, is they can gift an amount over the $15,000 annual gift exclusion by using some of their lifetime exemption, which is $11.18 million in 2019. If this is done, then a gift tax return must be filed in that year (consult your tax professional before making any gifting decisions).

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What to know: Assuming you are getting a mortgage, lenders will want to see the source of your down payment funds. Be sure that you have a clear paper trail to share with the bank, including but not limited to:

  • The donor’s name and address
  • The donor’s relationship to the homebuyer
  • The dollar amount of the gift
  • The date the funds were transferred

International gifts can add further challenges because of anti-money laundering laws and regulations. Check with your lender first if you plan to receive gifts from overseas.

Depending on the type of mortgage and property, you may need to show that some of the funds are coming from your own savings. Conventional mortgages for multi-family dwellings (two- to four-unit properties) typically require 5% down from the buyers. In the case of a cooperative, such as in New York or the San Francisco Bay Area, a co-op board may have its own criteria for the size and source of your down payment.

Just as important as what the lender requires is what you can afford. Even if you get help with the down payment, you’ll want to make sure that your ongoing housing expenses are still well within your limits; we typically recommend that monthly housing costs be no more than 28 to 32% of your gross monthly income.

Personal loan

How it works: Parents or other family members can lend money for a down payment or the entire cost of the home using an intra-family loan. In markets that are especially competitive, buyers are making all-cash offers with the help of such family loans. For some families this can be a win-win: The buyers get the help they need to get into a home, while the lenders may be able to earn a better interest rate than they can expect to receive from conventional income investment.

What to know: The familial lender will want to work with an attorney to prepare the correct documentation and ensure that the interest rate associated with the loan meets IRS requirements to consider this transaction a true loan — as opposed to a gift. If earning interest is not a priority, the holders of the loan can waive interest by using their annual gift exclusion amount of $15,000 or forgive some of the payment.

Keep in mind, however, that some lenders may not approve a loan if some or all of the down payment is borrowed as having an additional large debt to repay can be viewed negatively.

Co-ownership

How it works: This route tends to add a layer of complexity to the transaction, but for some buyers it makes sense for family members to purchase a home together. For example, a parent or grandparent may view co-ownership as a great way to invest in the housing market while putting their adult children on the path to ownership.

What to know: The key to co-ownership is documenting the details, anticipating future scenarios and agreeing to the terms and conditions upfront. Since each owner is liable for the property, it is extremely important to be confident the co-party will make their payments on time and won’t default on their obligations. 

Among other things, be sure to address questions such as:

  • Who is responsible for monthly mortgage payments?
  • How will you divide other expenses, such as taxes and insurance?
  • How you will divide ownership, and what happens if one owner passes away?
  • If it’s a rent-to-own scenario, what are the terms of the loan and are those documented?
  • If the home is sold, how will the debt be paid off and the proceeds distributed?

Co-ownership can raise many issues, both financial and emotional, but the more details you work out beforehand, the better off you’ll be down the road. 

No matter what route you end up taking to home ownership, be sure to think through why you're buying a home, how much you can truly afford, and what benefits and complications come with making it a family affair.

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The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.

If you’re ready to learn more about purchasing your new (or next) home, we’re ready to help you explore what’s possible.


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