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October 1, 2009
Downpayment as a Gift
I know this topic as been approached before but I hope to ask this in a more comprehensive way. In order to obtain a mortgage with help from parents in the form of a down payment gift, what series of events has to happen and what issues do we need to understand? For example, are there tax implications? If so, how can we not have this burden (would defeat the purpose)? Would it be better to just put the money in my bank rather than declare it as a formal gift? If we're ready to search for homes, what needs to happen first? Do we find a mortgage broker or bank to get pre-approval? Does a real estate agent come first? How does the "gift" roll into this process? When does that happen? Co-op or condo?
I'm sure I'm missing some things here and there so any advice would be helpful.
Thanks in advance.
Comments
I have friends who bought with a gift from their parents. Most banks will not allow this, so they had their parents give them the money over a year in advance so that their bank records would show it as their money when it came time to apply for the mortgage. I would start talking to a mortgage broker. If you need a referral, I just used Yossi Notik from Manhattan Mortgage. ynotik@manhattanmortgage.com He was great--I talked to 3 other brokers before I found him who told me they could not get me the type of loan I was seeking. We will close next week.
Posted by: landofenchantment at October 1, 2009 1:54 PM
There are tax implications for your parents. Gifts larger than $12,000 in one year require the gift giver to file a gift tax return. It doesn't matter if it's spread out monthly or if it comes in one lump sum. It's the total amount given that matters.
You, as the receiver, do not have to report the gift to the IRS or pay gift or income tax on its value.
Posted by: Bsquared at October 1, 2009 2:03 PM
I did this. We had the giftgiving parent as co-borrower on mortgage and co-owner on apartment. We then waited a perdiod of time, refinanced mortgage to eliminate his name and add mine and gifted co-op shares from him to me, getting new certificate all as part of refi process.
Posted by: linkinplace at October 1, 2009 2:08 PM
Your parent can also be co-owner and put his/her interest in a trust. A lawyer is best for this advice.
Posted by: daveinbedstuy at October 1, 2009 2:18 PM
I have seen what DIBS is suggesting and is not that uncommon.
Another way parents can help is to write the mortgage for you. They can offer rates signifciantly lower than the banks. They still have to charge interest to avoid the loan being treated as a gift -- there are specific IRS rules on how much the interest needs to be to avoid gift analysis.
Also, I am pretty sure (but check with a lawyer or accountant) each parent can give a gift up to the maximum amouint each year without triggering filing of the return. And they can give that amount to both you and your better half, so the parents (if there are two still) in fact can give a couple a total of $48K each year wihtout triggering gift tax issues.
Posted by: Boerumresident at October 1, 2009 2:26 PM
From what I recently learned its like this: The underwriter will often require that the person giving the gift write a letter swearing that it is a gift and also require that the person giving the gift qualify as a permissible relatives - parents are considered safe.
On the issue of taxes you as the recipient are free of responsibility but the person giving the gift will have a reporting requirement on gifts to any one individual exceeding 12k. That doesnt mean they will have to pay taxes on it, but it means they must report any amount over 12k. Otherwise they can freely give gifts of up to 12k to as many individuals they want without having to report it.
Often, where you have 2 parents and they can each give 12k to each of you (assuming you are a couple) then that allows 48k to pass to your downpayment with no reporting requirement or tax issue.
The amount over 12k will probably not pose a large tax issue for them as they have a million in their lifetime that they can give tax free (deferring that tax onto their estate in death as i understand it) Good luck!
Posted by: jetsettica at October 1, 2009 2:29 PM
bunch of babies. grow up and make your own money.
Posted by: josefsz at October 1, 2009 2:35 PM
FHA loans allow you to receive your DP as a gift. If you are "cash poor" you can also ask for a 6% sellers concession which will cover your closing costs and allow you to buy your mortgage rate down a little bit.
Call David Roma, our mortgage broker who specializes in FHA loans. He won't put any pressure on you at all which is why we decided to work with him over anyone else. Tell him Andrea and Anthony sent you.
(516) 753-6090 ext 230
Posted by: bedstuytownhouse at October 1, 2009 3:04 PM
^ lol thank you for that. i was waiting for someone to say it.
*rob*
Posted by: Butterfly at October 1, 2009 3:05 PM
You cannot buy a co-op with FHA though, only condo or 1-4 family home.
Posted by: bedstuytownhouse at October 1, 2009 3:06 PM
Typical documentation for loan application includes 2 months bank statements. If you already had the gift in your bank for 2 statement periods before you apply, you probably have no issues. If you don't have the $ yet, you need the gift letter which is no big deal - basically the lender making sure that the additional money isn't a "soft" unrecorded loan that you're obligated to repay.
The annual exclusion for gifts is $13,000 (effective January 1, 2009 per IR 2008 -117). You may be able exclude more from gift tax issues if both parents give up to 13k to you and your spouse.
Posted by: Bklnite at October 1, 2009 3:11 PM
well, seriously. if you're living on support from mom and dad, you might as well be living in their house. why don't your parents just buy it? they'll get a better rate on their mortgage.
Posted by: joe_the_bummer at October 1, 2009 3:15 PM
Uhm Joe - OP is asking about a ONE time lump sum not his monthly carrying cost. I wish I had rich parents. You would be as dumb as Rob and josefsz if you do not take advantages like this.
Posted by: crimsonson at October 1, 2009 3:33 PM
HOLD UP PEOPLE.
landofenchantment is incorrect. Most banks if not all banks allow DP as a gift.
As per Fannie Mae rules if the Loan to Value is 80% or less the ENTIRE down payment can be used as a gift. If the LTV is over 80% the borrower needs to contribute 5% of their own funds. Fannie Mae will accept condos, coops, 1-4 units.
FHA loans have no restriction on DP gift and will let you finance 96.5% FHA will NOT do Coops, and if you want to do a condo with them it's tricky at best and the entire condo must be fha approved. FHA loans have 1.75% upfront premium that is financed into the loan amount. You do not pay for it is cash but the effective loan amount will be higher to cover the FHA premium. FHA loans also have monthly MI payment of .55 annually divided over 12 months for the 1st years.
Regarding Tax implications. I AM NOT AN ACCOUNTANT but banks do not report gifts to the IRS. A great deal of First Time Home Buyers use gifts as part of the down payments.
If the parents buy the property with you, you must qualify for the mortgage on your own. Their income can not used in qualifying for the loan or it will be considered an INV property and subject to INV limits and INV rates.
FHA loans will allow you use your parents as a Non-Occupying Co-Borrower without penalty. See above for FHA loans.
-Adam
Posted by: Adam Dahill at October 1, 2009 3:36 PM
quite true crimson. in fact, it's not that i'm dumb. i'm just jealous.
Posted by: josefsz at October 1, 2009 3:36 PM
Had a typo up there.
"FHA loans also have monthly MI payment of .55% annually, divided over 12 months for the 1st 5 years."
Posted by: Adam Dahill at October 1, 2009 3:40 PM
crimsonson -- that's quite a lump. let's say it's 100K for a 1MM pad. and the same kids who can't save that are going to suddenly be able to afford 5K a month? and then u think M&D are going to let the place go into forclosure when junior loses his job?
I'm sorry for the bitterness. it just sucks that when I lose bidding contests for apartments, I'm competing with someone's parents.
Posted by: joe_the_bummer at October 1, 2009 3:49 PM
Hi everyone,
Thanks for the comments, even the negative ones. This was/is very helpful.
Everyone has their own different circumstances, no need to go into it w/ the rest of Brooklyn but I can assure joe that if I/we need a little bit of help to capture the American dream in the most expensive city in the States, we won't get carried away and think we can suddenly bid for the penthouse in your favorite co-op.
Keep the advice coming!
Posted by: jcnycarch at October 1, 2009 4:01 PM
A lot of banks will see the large dollar transfer in your account and want a letter stating that it is in fact a gift and not a loan. No biggie, it's just that if it were a loan they'd factor those payments into their affordability calculations.
Posted by: Johnny at October 1, 2009 4:06 PM
Having something handed to you is the epitome of the American Dream.
When you get your property tax bill that goes toward educating someone else's children...don't forget to kick and scream and moan.
The other part of said "American Dream" is pulling that ladder up behind you - like you never even saw it.
Posted by: HoneysuckleWeeks at October 1, 2009 4:13 PM
lots of people here counting other people's money.
Posted by: mt_molehill at October 1, 2009 4:24 PM
no seriously jcnycarch, I wish you the best. I am totally immature and could not help my self. (arg) OK It's all good. If there wasn't a lot of dough in this city it wouldn't be what it is. At least don't give it to the government! Good luck!
Posted by: joe_the_bummer at October 1, 2009 4:32 PM
re: gift tax-- I was just looking into this today (for other reasons). Though the annual limit on gift tax is $13k per year per person, your parents won't necessarily have to pay taxes over that amount if they gift you more. Rather, there is a $1 million lifetime cap on gifts (so, lets say they give you $50k and you can claim it as $26k between you and your spouse--that means they've used up $24k of their lifetime gifting...).
All this said, when my mom gave me money for the down payment on my place (which I subsequently paid back when I sold), we put her name on the property. That way, if something happened to me (or in this case, you and your spouse), the property reverted to her. It sounds like your parents are less worried about getting the money eventually back and its more like a true gift, though!
Posted by: ms_boerum at October 1, 2009 5:02 PM
Sorry, one other thing-- The mortgage broker I went through didn't blink and eye when I said the down payment was a gift from my mother and simply asked for her bank statements to prove she had the $.
Posted by: ms_boerum at October 1, 2009 5:06 PM
You know, I don't know anything about loans and down payments but I know this: I am really jealous and I hate you :)
Posted by: young archi at October 1, 2009 5:28 PM
....No, seriously
Posted by: young archi at October 1, 2009 5:28 PM
Here's my opinoin ( and something I've done)...
... Forget "gift", but keep in mind the 3+ month "incubation" period that banks like (seeing the money in your name for an extended period of time, multiple statements, etc - so it's not nefarious in origin).
The easiest thing to do have your parents (or whoever is giving you the gift) to consolidate the funds in one of their accounts. Have your names added to the account. After a few months of statements with your name on the account it'll look like your money in a joint account and you can avoid a lot of other hassles...
Posted by: christopher at October 1, 2009 10:43 PM
To those who say mean things to people who receive money from family to buy a house -- this is something families do often to avoid inheritance taxes later on. If families dole out some money periodically to their offspring while they're alive it's smarter financially.
So, to be against helping kids buy a house you're saying you're against parents leaving any kind of inheritance to their children. The very reason many people DO work hard all their lives is to leave something to their kids and give them opportunities they didn't have.
ANYway. The person who said each parent can give you the $13K before taxes kick in is correct. I know this because my conservative banker father who never cheats on taxes did that to help us pay for a renovation. Another thing your parents can do is time it so they give you some money at the end of 2009 and more money at the beginning of 2010. Sending you checks mere days apart but in two different tax years.
Posted by: traditionalmod at October 2, 2009 9:36 AM
Another issue here that has not been mentioned: If you're interested in a co-op and your parents are covering most or all of the DP, make sure that co-op board is 100% comfortable with the arrangement. I would hope that most boards have dealt with this by now, but some may spook at having parents cover the DP even if the bank approves and the buyers are handling the mtge and mt. costs thereafter.
Finding an experienced agent is important, as they'll know which boards will pull stunts such as asking your parents for the past two years of complete financial statements - many parents, esp. out-of-staters, will object to this.
I speak from sad experience on this - when we sold our co-op several years ago, our first buyer was rejected for this very reason. It was a very small co-op and the board was just too inexperienced with the issue.
Posted by: petunia at October 2, 2009 12:01 PM
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