Can Your Parents Give You Money for a Down Payment on a Mortgage?
One of the biggest challenges Millennials face when buying a house is saving enough for a down payment. Even a 3.5% down payment can equate to thousands of dollars (or even tens of thousands depending on where you live). And with student loan debt hurting the monthly budgets of many Millennials, it’s not always easy to save up the cash you need, even if you can afford the monthly payment of your dream home.
That’s why more and more people are using money from their parents to help relieve some of this financial burden and better qualify for a mortgage. But using gift money for a down payment or other mortgage-related expenses isn’t as simple as depositing cash into your bank account.
Here’s everything you need to know about getting gift money from your parents to buy a house.
How much can parents gift for a down payment?
If you’re buying a house, your parents may offer (or you may ask) for gift money to help with your down payment. Whether you’re getting a conventional loan, FHA loan, or any other type of mortgage, a gift money can help you reach closing day much more quickly — as long as it’s something that all parties agree with.
While any amount can be given as a gift, the important issue is whether or not you’ll have to pay gift money tax. The gift tax limit, however, is fairly broad. Each parent can give one person up to $14,000 per year. So if you’re married and your mom and dad are both on board with gifting your money for your down payment, each parent could give you $14,000 (for a total of $28,000) plus another $14,000 each to your spouse (that’s another $28,000).
In this scenario, the gift tax limit would be $56,000 per year for a couple with two contributing givers. Obviously, you always want to consult with a tax professional to confirm your exact tax scenario. But when it comes to who pays gift tax for mortgage down payments, the answer is you, since you’re the one essentially receiving additional income for the year. Make sure you understand the real limits so you don’t accidentally end up with a high tax burden the year you buy your house.
What is a gift letter for your mortgage?
When you use gift money from your parents, you need to make sure you have all the proper paperwork to make everyone happy. The lender, for example, needs a mortgage gift letter to determine the source of the cash and the validity of it actually being available by closing day.
What needs to be included in your mortgage gift letter?
Basically, you need a signature from the giver (your parents) stating that it is truly a gift, not a loan. You’ll need to include your parents’ names and contact information plus your name and your relationship to the giver. Also include details on the gift amount and the date the money is given. Finally, the letter should include the address of the property you’re buying, so this is definitely something that should be completed later once you’ve had an offer accepted on your home.
All of this information helps lenders confirm information in your bank statements. Any large deposits (beyond your typical payroll) generally require a letter of explanation. Basically, the lender is required to make sure you’re not a terrorist or drug dealer. The gift letter from your parents provides clarity and makes the path to closing much smoother.
Can closing costs be gifted?
In addition to having cash on hand for your down payment, buying a home also requires a large chunk of change to cover your closing costs. While it’s becoming more of the norm for the seller to cover some or all of these costs, this isn’t always possible — especially if you live in a competitive real estate market where bidding wars are common.
Consequently, you may wonder if you can get your parents to gift you money for closing costs instead of (or in addition to) your down payment funds. Luckily, the answer is yes: you can use gift money from your parents for your closing costs.
The downside is that all of your total gift money for the year counts towards those tax totals we talked about earlier. So if you’re single and just receiving gift money from your mom, you can only receive $14,000 before you have to pay additional taxes on that money.
What do you do if you need more money than the tax limit allows for?
In that case, you need to run the numbers to decide if taking a one-year hit on your taxes is worth being able to buy your own home. Plus, using that money can help you avoid financing your closing costs or paying a higher home price to get the seller to cover closing costs. Even though a one-year tax bill could be hefty, it could potentially cost you a lot more money in interest over the course of a 30-year mortgage.
Simply put, you need to weigh the short-term and long-term advantages and disadvantages to figure out what makes sense for you.
Two More Options for Getting Parents’ Help on Your Mortgage
If your parents want to help but can’t offer you a cash gift, there are two more ways they can help you qualify for a mortgage.
Getting a Family Loan Instead of Gift Money
Instead of being given money, your parents could potentially give you a family loan instead. The intention behind a family loan is that you’ll pay back the funds over a certain period of time. If you’re ok with mixing money and family, there are a few advantages.
First, if you’re taking out a family loan for the entire mortgage, you can put in a cash offer in a competitive marketplace. With no financial contingencies for the sellers to worry about, you may be able to negotiate a lower sale price plus expedite the closing process.
A family loan can also help you avoid fees such as an appraisal and lender origination fees. Another perk? Your parents probably won’t care about your credit score, so even if it’s low you can still get the financing you need to buy a new home.
What’s the catch with using a family loan? The loan must be registered and treated as a mortgage with the IRS in order to be legitimate. This can protect both parties involved, which is important no matter how close you are to your parents.
Getting Parents to Act as Co-signers
Another option is to get your parents to be a co-signer on your mortgage with a traditional lender. This lets you use your parents’ financial and credit information as part of your loan application, which can help you in a couple of different ways.
By adding extra income to your mortgage application, you can lower your debt-to-income ratio. So if you have a lot of student loan debt or even credit card debt but still want to qualify for a certain mortgage amount, a co-signer can help you overcome this obstacle.
If your parents have a strong credit score, that may also work in your favor and help you qualify for a better interest rate. Obviously, that can save you a boatload of cash over the life of your mortgage.
The downside, of course, is that your mortgage will then be attached to your parents’ financial well-being as well. If you’re late on payments or go into delinquency or foreclosure, you’ll negatively impact their credit and their lives. You should also talk about what happens if you get into a financial tight spot at any point. Will they help you make payments or are you on your own?
In order to release your parents as a co-signer on your mortgage, you may need to refinance the loan entirely. You’ll also need to file a quitclaim deed to release your parents from any legal obligation to your property.
Mortgage Help from Your Parents: Is It Worth It?
No matter what kind of financial help you receive from your parents, it’s important to set up clear expectations ahead of time. If repayment is expected at any point, make sure you discuss worst case scenarios and what the plan is if those moments ever come to pass.
On the plus side, getting gift money for a down payment, closing costs, or even the home loan itself can put you on the path to home ownership much faster than you initially expected, getting you inside your dream home without a major financial burden.