Your “Gifted” down payment – not as simple as it sounds

Are your parents willing and able to provide the money for a down payment on your first home as an outright gift? Good for them, and good for you!

Since gifted down payments do come with some rules and regulations, the next step is to make sure you do it correctly. The process can be simple or complicated, depending upon how you go about it.

First, that down payment must be a gift, not a loan. Your parents must be willing to sign a statement swearing that they do not expect repayment. While there’s nothing to stop you from reimbursing them at some later date, repayment must not be required.

Take this seriously, because lying on a mortgage application IS a felony offense.

Second, remember that there’s a limit to the amount that can be gifted Tax-free. Right now, each parent can give you up to $14,000 per calendar year. Giving more will put them in a position of paying a tax penalty. Giving the full $28,000 will simply add another form to their income tax report.

If you’re going to need more than the combined $28,000, your parents should gift the money over multiple tax years. For instance, if you plan to buy next Spring and will need more than $28,000, have them move money into your account now – before December 31.

The bank won’t just take your word for it. Those gifted funds must be verified. Not only must you provide a paper trail to show how the funds got into your account, your parents will be required to show that the money was theirs to give.

The bank will require two months of statements from your parents as well as from you, and they’ll have to show that they aren’t going to go broke from giving you money. Thus, if the down payment money will be coming from several accounts, they should be prepared to present statements from all those accounts. They’ll also need to show that they have plenty of money left over after helping you.

Often parents feel a little uncomfortable about handing over all that personal information, so warn them ahead of time.

There is a way around this stress, strain, and paperwork. It’s called planning ahead.

Once you know that you’re ready to purchase that first home and your parents have expressed their willingness to provide the down payment, get that money into your own account. Funds that are “seasoned” are not subject to all this scrutiny.

That means you should have the money in your name at least two months prior to getting pre-approved for your home loan. Remember that banks produce statements on different days of the month, so two months on the calendar does not always equal two months’ worth of bank statements. Before you see your lender, check those statements to see that the money shows in the beginning balance, not as a deposit during the month.

By the way… this same advice applies to any additional or unusual funds coming into your accounts.

So if you’ve been stashing a nest age in a personal safe, put it in the bank.  If you plan to sell a boat, a car, a motorcycle, or any other larger-ticket item, do it more than two months in advance, so the money appears as seasoned on your bank statements. Otherwise, you’ll have to present a variety of proof to show that the sale was legitimate.

One couple who sold their motor home to a cousin found that the bill of sale was not enough. The cousin had to provide proof that he had licensed the motor home and paid sales tax on the transfer.

If you fail to follow these steps, the bank will look at those funds as a loan and will include them in your debt when deciding if and how much they’ll lend. That, of course, could prevent you from purchasing your first home for at least a few more months.

Having parents who are willing to help you own your first home is a wonderful thing. Handle it correctly and it will also be a stress-free process.

Do you have questions? We at Homewood Mortgage, the Mike Clover Group, are always willing to give you answers. So give us a call. You can reach us at 469.621.8484.