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Giving a Down Payment as a Gift

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If you are considering surprising your kids with a special gift in the form of a down payment for a home you will not only make them happy, you will receive a substantial tax break depending on the size of your gift. The Internal Revenue Service (IRS) now offers a tax exemption for up to $13,000 annually for gifts to their children or anyone for that matter, up from $12,000 in 2008. The recipient will pay zero tax and this exemption has a life-time ceiling of one million dollars, so that means there’s a lot of joy to spread around if you have it. Theoretically, a married couple is able to give this gift four times a year to their child and the child’s spouse, for a total of $52,000.

As it is with any tax related matter knowing exactly how to go about it, and having the assistance of a tax accountant or attorney, can help you to take full advantage and not make any mistakes in the process.

Your Child’s Mortgage Lender Will Need to Be in the Loop from the Start

If you have decided to transfer funds for a down payment to your child you must do this before they make application for their mortgage loan. The lender will require complete and thorough documentation that can verify that the down payment money is a gift and not simply a loan. In most cases the person providing the gift will have to be able to verify where they got the funds. A bank or other financial statement is usually considered valid proof of the source of the money. If you are uneasy with presenting a full statement of the account where the money is coming from then request a letter from the financial institution that states you are in fact an account holder with them and you have the means to make such a generous gift.

One institution, Chase Mortgage, not only requires the proof of means, but also requires that the letter clearly states the exact amount of the funds which are specifically a gift and not a loan, and it must also show the particular relationship between the donor and the recipient. Chase Mortgage also requests that the letter affirms that the funds are not coming from anyone who has an interest in the sale of the property.

Before you transfer any money to your child’s account make certain you have done your homework and fully understand what each lender will require and when.

Depending on the Mortgage Lender the Gift Recipient May Still Need to Contribute Some of the Down Payment from Their Own Funds

If the recipient of the loan is borrowing money from the FHA the gift can amount to the full amount, 100%. However, if the loan is from a conventional lender there may be some stipulations to be aware of before you transfer the funds.

Typically, with a conventional loan, the borrower must have five percent of the down payment before they receive the gift unless the gift amounts to more than twenty percent of the property’s purchase price. The reason for this is that the loan-to-value (LTV) ratio is an acceptable one for the lender who will not have to absorb more risk if the LTV were lower.

Note: Relative to mortgages the LTV is the ratio of the amount of a potential mortgage to the value of the property it is intended to finance, expressed as a percentage. It is used as a way to assess the risk of making a particular mortgage loan. A lower loan-to-value ratio is seen as a lower risk to the lender.

Can You Really Afford to Gift Such a Large Sum?

Many parents who want to help their kids by giving them the gift of a down payment may not actually be in a position to do so. If you are elderly, or still saving and planning for your retirement, make, certain you can give this money away and not put yourself behind the retirement 8-ball. In some cases the gift becomes a future liability when the parents run out of retirement funds and their children then need to contribute to their ongoing living expenses.

It May Seem Like a Lot of Money But Is It Enough?

Before you decide to help out and give your child money for a mortgage loan down payment ask yourself if it is enough. If the gift, plus what your child already has saved, is not closer to twenty percent rather than ten percent of the required amount think twice before helping out. It may not be helpful if your child is going to have to struggle to make the future payments or be exposed to future declines in home values while having so little equity in their property.

The bottom line is to make certain you can afford to give such a generous gift without hurting your own financial situation and that you do all the leg work before starting. If there are any aspects you are not sure about consult a financial or tax professional and the lender so you are aware of all the requirements.

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