Contrary to popular opinion, younger homebuyers under the age of 35, generally considered part of the Millennial generation, are interested in buying homes and are now entering the real estate market in greater numbers. Many of these younger buyers receive help from parents or other family in order to bolster their finances for the purchase. In 2015, 75% of young buyers received financial help from family for the down payment, closing costs, or other expenses, according to TIME Magazine.
Many lenders will allow buyers to use gifts from family for the down payment and closing costs. Typically a letter from the parents is required stating that the funds are truly a gift and not a third-party loan. The lenders do this in order to make sure the buyers aren’t financing the purchase through multiple loans on top of the mortgage loan. Parents or other family members can then gift money for the down payment to the children and include a simple letter, which does not need to be certified in most cases. A gift given in this way, with a letter documenting that it is in fact a gift and not a family loan, also helps the buyer to avoid increasing their debt-to-income ratio, which could prevent them from getting the mortgage at all.
While lenders are usually OK with a gift being used as part of a down payment, most still want the buyers to use some of their own money as well. Many banks require that 5% or 10% of the purchase price come from resource other than a gift, just to make sure the buyers have a handle on managing their own finances.
The gifting allowance may only apply to a personal residence, and you may need to check with your specific lender on what they will allow. Some banks don’t allow gifts to be used for a down payment on a second home, vacation home, or investment properties. Some will only allow gifts from close relatives, such as parents, and not from distant relatives as well.
However, there may be tax implications for the generous gift givers depending on the size of the gift, as you can typically only give a certain amount without incurring the gift tax. Parents and other family helping young buyers need to be aware of the gift tax rules. In general, you can give any person a monetary gift up to the “gift tax exclusion amount” each year without being subject to the federal gift tax. Spouses are excluded from this rule, and spouses can gift each other unlimited amounts. The 2017 exclusion amount is $14,000 in a calendar year. Anything above $14,000 could potentially be taxed at the 40% gift tax rate and you would have to file the gift tax return, which can be complicated.
Keep in mind that this exclusion amount is per person. Take the example of a couple with one married child. Each parent can gift their child the maximum of $14,000. Each parent can also gift the child’s spouse $14,000. This means that the child and the spouse would each receive $28,000 from the parents, for a combined gift of $56,000.
White, Martha C. “Many Young Adults Need Parents’ Help to Buy a Home.” March 26, 2015.