The first time I talked with a mortgage broker about buying a home, he suggested I just ask my parents for help coming up with the down payment.
“It’ll be easy,” he assured me. “You just get it as a gift. Lots of first-time buyers do it.”
In some ways, he was right. Many people do get help from their parents—after all, many of us are dealing with crippling student debt or other financial burdens that make it difficult to amass the cash needed for a down payment.
But he was wrong about one big thing: It ain’t easy.
Getting down payment help from the parents (or anyone else) isn’t as simple as just asking and then receiving when the money rolls in. If you’re going to do it, you’d better do it right. Avoid some of the big mistakes I made with an eye toward these tips.
1. The down payment must be a gift
What my mortgage broker should have told me is that the money has to be a gift. If a lender suspects the money might be a loan, repaying said loan will be factored into your mortgage approval amount and you’ll qualify for less than you might have wanted.
In order to prove it’s a gift, you’ll have to get a gift letter from the person who gave it to you—your parents (or the gifters) will need to swear on paper they don’t plan on asking for the money back. Thankfully, my wise parents had already put up a down payment for my sister and they knew this drill. But if yours don’t, get them up to speed quickly.
“The gift letter is very serious,” says Casey Fleming, mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage.”
“While it is doubtful that a lender would ever audit a file after the fact to see if the recipient is paying the donor back, if the transaction goes bad, you might very well find yourself with a subpoena in your hand.” (True story—it’s a felony to lie on a mortgage application.)
2. You’ll want the down payment in advance
When you’re getting help, you have two options: 1) Take the money from Mom and Dad now, during the early planning stages, and save yourself some headache (and paperwork) later on, or 2) wait until you’re ready to buy and have your parents send the money just before you walk into your mortgage broker’s office.
Both will work, but if you have any say in the matter, get the money as early as possible.
“If the funds are ‘seasoned’—meaning that they’ve been in the account long enough so that the last two bank statements don’t show the deposit—the gift does not have to be addressed,” Fleming says.
My parents opted for a last-minute donation, and I was more than happy to have the help however they chose to give it. But it was tricky getting a lender to take it on faith that I’m going to get a big influx of cash once I find a home to buy.
3. There’s a limit to what can be gifted (tax-free)
The timing isn’t the only thing that’s tricky. There’s also a limit to how much someone can fork over to you—tax-free, at least. Under the current rules, any gift of $14,000 and up will incur a tax bill. So your parents will have to gift you less than that, or pay a tax penalty at the end of the year.
Of course, there is a (perfectly legal) loophole of sorts.
“It is $14,000 per year per donor, so a couple could give $28,000 ($14,000 from each) to their child,” Fleming says.
4. Gifted down payment funds will have to be verified
So you did your due diligence and you got a gift letter. Good for you! But guess what? That gift letter might not be enough for your lender to verify the funds. To do that, your parents are going to have to provide a paper trail.
Bank statements should do it, Fleming says, but be ready for this to feel a little … invasive.
Most lenders will require two months of statements from the gifter’s account, including all pages from each statement. Those bank statements will need to include all relevant information, meaning your lender is going to see your parents’ bank account number and personal information.
That felt weird to my parents, who worried about the security risk of faxing that information to a virtual stranger. But really—it happens all the time, so don’t let them freak out over it.
5. Your parents can’t go broke trying to help you
We both know your parents aren’t going to give away all of their money for the sake of your down payment, but your lender has to know that, too. That’s why your folks will have to prove with bank statements that they can comfortably afford the gifted down payment—and have sufficient funds left over.
If your parents are going to use a separate account for the down payment, or they split their money over several accounts, make sure your lender knows what’s going on and have your parents provide extra proof that they can afford to help you.
Just be sure to also provide your parents with extra proof of your gratitude. And invite them over for dinner once in a while, eh?