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gifting down payment

Posts Tagged ‘gifting down payment’

Should You Gift A Down Payment?

Tuesday, December 7th, 2010

According to the National Association of Realtors, 36% of the past year’s first-time buyers turned to their friends and family for help with a down payment, up from the previous year’s 28%.

The editors of Money Magazine have compiled a list of guidelines to follow when considering whether or not to gift a down payment to your child, extend a loan, or cosign their mortgage.

Make a gift if . . .

You want to chip away at your estate. Right now, you and your spouse can each give $13,000 tax-free per year to your child (and another $13,000 each to his or her spouse). A larger gift will simply count against your $1 million lifetime gift-tax exemption, so you still may not have to pay gift taxes, says Morristown, N.J. financial planner Chris Cordaro.

He’s just shy of 20%. If your child has, say, $38,000 to put down on a $200,000 home, kicking in a couple thousand dollars means he won’t have to pay for private mortgage insurance.

You can have an open family discussion. Your other kids should know that you are providing this aid, whether you intend to help them in a comparable way, and if not, why you made that decision.

Draft a loan if . . .

She can pay you back and still qualify for a mortgage. Rules prohibit family loans on the 3.5% down payment needed for government-insured FHA mortgages. For conventional mortgages, lenders typically allow parents to fund only half to three-quarters of a 20% down payment, says San Francisco mortgage broker Edward Craine. The bank will also want your child’s monthly debt payments — including the mortgage, the loan to you, student and car loans, and credit card payments — to be less than 40% of her pretax income.

You’re prepared to lose the money. Your kid may fully intend to repay you, but her ability to do so could change quickly if, for example, she loses her job or has to move suddenly. “As a parent, you are typically the last one in line to get paid,” says Cordaro.

Cosign the mortgage if . . .

Your child has no other way of getting a loan. Cosigning is risky. After all, you’re on the hook for the mortgage if your child runs short of cash. But it might make sense if your kid is, say, in grad school and already has a job lined up, or has a solid but sporadic income that would disqualify him from getting his loan approved.

For more general information and tips on how to get started, visit CNN.com – Should you give your kid a down payment?

how to gift down payment