When buying a home, many people ask their parents or other sources for help coming up with the down payment. But this often isn’t as simple as just asking and then receiving the money. If you’re going to do it, you’d better do it right. According to Realtor.com, here are some tips that can help you avoid mistakes if you’re considering getting help with your down payment.
The down payment must 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. 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 you to return the money.
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.
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.
Gifted down payment funds will have to be verified
A 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. 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.
Your parents can’t go broke trying to help you
Your folks will have to prove with bank statements that they can comfortably afford the gifted down payment—and have sufficient funds remaining. 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.