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Using Gift Money for a Down Payment

Just about every week I have a grandmother (or mother) registering on my real estate website who tells me, “My grandson can’t seem to find anything to buy in his price range so I’m searching online to help him.” As if there is some magical website out there with available homes that her grandson and his REALTOR® are not seeing. Trust me, I get it. She’s just trying to help because she cares about him and wants him to find a good home. One such conversation this week lead into an entirely conversation though.

As I was talking to Frances, she told me her grandson was having trouble because he keeps making offers, but is losing out to other buyers that have more money down. Apparently he is trying to buy a home using an FHA loan with only 3.5% cash down payment and other buyers have 10-20% cash down payment for their home purchase. I explained to her that it’s not just her grandson that’s having this problem right now. FHA and VA buyers that have very small amounts down are getting beat out in this market, especially when they’re making offers on the very best, most updated homes that everyone else is interested in. Sellers typically view a buyer with 20% down as a more solid offer. Everything else being equal (good credit score, offer price, solid pre-approval letter from a lender) then sellers and their agent will typically choose the one with the most cash down.

I told Frances there is a way to truly help her grandson. If she has the financial means to give him money to use for the down payment, she can give it to him in the form of what’s called “gift funds.”

When buying a home, the biggest upfront expense is likely to be the down payment. In our current, strong seller’s market, gift money is becoming more popular, especially among millennials. Even if they make good money, because of large student loan amounts, it can be difficult for them to save for a down payment.

In 2020, 58% of home buyers came up with their down payment primarily from their own funds. But this cost is often prohibitive, especially for first-time homebuyers who don’t have the benefit of funds from the sale of their current residence. That’s where a down payment gift comes in — if a close family member wants to chip in and help the prospective homebuyer purchase a home, they can do so. However, there are strict rules and regulations for such a transfer of cash so you’ll need to speak with a home lender about this before doing anything.

As of 2018, parents can contribute a collective $30,000 per child to help with a down payment — anything after that would incur the gift tax. The person receiving the money doesn’t have to pay taxes on those funds. Other family members have a $15,000 lending limit before they too have to pay taxes on those funds. It’s important you check with your CPA before making this decision though. In many cases, there’s no limit on the amount of gift money that can go into a down payment, as long as the buyer is purchasing a primary residence. My real estate team actually had two different clients this year that paid cash for the home and then acted as the bank for their kids to pay it back. For them, it just made financial sense for both parties, and their attorney structured it for them.

In Frances’s case, she confessed that she’d already been thinking about giving her grandson some of his inheritance money to use for buying a home. I advised her to speak with her financial planner first before offering this option to her grandson, and then speak directly to his lender as well. There are specific guidelines for doing this and the lender can walk her through the process to make sure it’s done correctly.

Frances thanked me for the information and was glad I called her. She wondered why her grandson’s real estate agent hadn’t mentioned this. I told her, “There are always many options but unfortunately, most REALTORS® don’t bother to ask enough questions or know the available options themselves.” I wasn’t able to help her grandson buy a home, but I was glad that I was able to help her and her grandson with good information.

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