Give a deposit to an adult child

Homeownership is one path to wealth building, and providing your child with a down payment can help get them started on the path. Before committing to a down payment gift, however, carefully consider the impact on your own finances.

What to know about down payment gifts

The practice of offering a deposit to a child is quite common. In fact, 28% of buyers used gift funds from family or friends for a down payment in 2021, according to the National Association of Realtors. Many adult children who receive a down payment receive funds for important milestones, such as graduating from college or getting married.

For parents, donating a down payment is one of many ways to transfer wealth, often with less tax implications.

For the 2022 tax year, you and a spouse can each give your child up to $16,000, for a total of $32,000, without triggering gift tax. There is, however, a lifetime exemption beyond that (at the federal level, $12.06 million in 2022), which means that even if you give your child more than the annual limit, you probably won’t have to pay gift tax anyway. (The exception may be if your state imposes estate or estate taxes.) As with any major financial move, talk to your tax professional about what will apply to your situation.

Gifts of funds are also no problem for mortgage lenders – you can even offer a full down payment instead of a part. However, your child’s lender will take steps to ensure that the money is from a legitimate source and that you do not expect to be reimbursed, so you will need to be prepared to cooperate with this process.

Should you give your child a deposit?

Particularly in an environment of high rents and high student debt burdens, it is difficult for young people to save for a down payment. Helping your child buy a home can allow them to start building capital earlier, contributing to their long-term financial well-being.

“Giving a down payment can be a really smart thing to do that benefits your child for the rest of their life, says Chaim Geller, CEO of HelpMeBuildCredit.com.

Giving a down payment might also be a better alternative to co-signing your child’s mortgage. If you co-sign the loan, you will be responsible for the payments if your child cannot make them, but you will have no interest in the house.

“Donating is much more predictable than co-signing and is very different from having your credit responsible for 30 years,” Geller says, referring to the typical mortgage repayment term.

Even if your child is now financially stable, they could lose their job or face other difficulties in the future. If you are retired or about to retire, you may not be able to afford this cost on a fixed income.

“[Co-signing] is a valid way to finance homes, but whenever possible, donating is a less risky option,” says Dan Green, CEO of Homebuyer.com.

Also think about why your child needs help buying a house. Your support might not be enough for them to become successful owners if they lack financial knowledge or are not responsible in general, for example.

“If the child needs a co-signer or help with the down payment, parents should always sit down, review their finances, and know their plan for making the payments,” says Geller.

“Children can dream big, and that can be unrealistic. Understand how much they plan to buy, how much the monthly payment will be, and how they will support the purchase. »

Keep in mind that if you’re not comfortable co-signing, it’s okay to say no.

“Saying ‘yes’ can be a lot more expensive than saying ‘no,'” Geller says. “Saying ‘no’ may annoy you temporarily, but if the child buys a house they cannot afford and the house is foreclosed, the parents’ credit will be destroyed and the relationship will be much worse due to the co – the signature goes wrong.

How to give a child a down payment for a house

1. Check your emotions

If you want to help your child with a deposit, avoid emotional decision making. Carefully assess how much you can realistically afford. You don’t want to withdraw money from a retirement or savings account or a life insurance policy, for example, if it means financial problems for you now or later.

2. Donate early

To give your child a deposit, you can send the money directly to their bank account via bank transfer or online or by check. Do this at least two months before your child intends to apply for a mortgage. This way, the funds have time to “season”, in lender parlance. This verifies that the funds are from a valid source.

“Funds will need to be tracked or ‘sourced’, to use the industry term,” says Green.

3. Organize your documents

You will need to write an installment gift letter to your child’s lender that includes your name (and your spouse’s name, if applicable) and contact information, the amount of the gift, and the purpose of the gift. In addition to the letter, you will also need to provide account statements showing the movement of funds.

Other ways to help your child buy a house

  • Allow your child to rent a room at home at a reduced price or for free. If you’re okay with your child living with you and you have the space, you can help boost their savings by offering a room in your home, either at no cost or for below-market rent. If you choose to charge rent, make an agreement on how long they’ll be tenable, as well as any other household expenses you’d like them to contribute to during their “lease.”
  • Buy the house, then ask your child to pay you back. This option might simplify the process for your child, but it is still a complicated situation. “This type of transaction should only be done with the help of an attorney and not informally,” says Green. “When the landlord goes to sell, they won’t be able to get a clean title if they find out you’ve done something wrong. Consult a real estate attorney and don’t take shortcuts.
  • Home search assistance. As a first-time home buyer today, your child faces limited options at high prices, and it might take some time to find a home. If nothing else, help them in their search. “The home buying process can be very tedious, and giving them a backbone could be very helpful,” Geller says.

About Matthew R. Dailey

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