The Gift Letter

We are talking a 360-degree look at Millennials!

What they’ll mean to real estate. What they’re looking for, how they’ll pay for it. In other words – how they roll!

And we’re going to take an in-depth look at a really important factor – generous parents!

Fact is, many young people get the down payment for their first home, from family members. Many Moms and Dads regard helping their children buy a house to be a joy! They’re happy to do it, as they propel their children into a life of home ownership.

But there are rules, and there are issues both the parents and the child need to know about.

First of all, And this is right out of mortgages 101. If a buyer is getting a home loan, they can’t borrow the down payment. The money has to belong to the buyer. It can’t be a loan.

So, parents, if your child is getting a home loan, you will have to GIVE them the down payment. And, you’ll be asked to sign a gift letter certifying that your child does not have to pay the money back.

That’s a big pill to swallow, I know. But it’s not just the parent’s money we’re talking about. A buyer can’t borrow the downpayment, period, from ANY source. Not a line of credit, not a credit card, not a loan against your car title – nothing. Borrowing the down payment just won’t fly.

And here’s another thing. The money should be in the child’s bank account, when they apply for the mortgage.

This came up a LOT when I was working with young buyers. Dad would say, for instance, Sure I’ll give you $25,000 to buy a house. And you’ll get it – at the closing table.

Many parents say that. And unfortunately, it just doesn’t work.

The lender has to see the money in the child’s bank account, before they OK the mortgage. Lenders don’t do well with promises….like, my Dad promises to give me $25,000 when I go to settlement. Not gonna work. Any more than if you promise you’ll get a raise before you buy the place. The lender works with what is right there in writing, and what they can verify….not promises.

And here’s another issue. The parents say, honey, we will give you $25,000 for a house. But before we do, we want to see it, and make sure it’s a good house.

OK, so that’s fair. The parents might have bought a lot of homes. They might be experienced at real estate. And they want to try to help! To keep their child from making an expensive mistake.

Now this one…is ok, in a buyer’s market. Where the pace is slow, there are lots of homes for sale, and everyone has plenty of time. In a market like that, sure. The child finds a house. Dad and Mom fly in to take a look. They like it, and they give the child the money. Then, the child writes an offer, it gets accepted, the child applies for the mortgage, and it heads to settlement.

But this is not a buyer’s market. In most parts of America it’s a seller’s market….there are fewer homes for sale, and competition for those that do come on the market. In a sellers market, buyers have to be lightning fast, to beat the competition. The money the parents give the child, will have to be in the bank….way ahead of time. So that the child can get pre-approved for the mortgage….and have it all lined up, before they even start looking for a house.

One last thing – for all you Moms and Dads. Before you write a check to your kid, you might want to talk with your accountant, or your financial planner. Make sure you understand all the tax issues that might, or might not apply, when you give your child tens of thousands of dollars. And make sure you can afford it. Don’t get into financial trouble, just to give your child a financial head start.

But as I said, it happens all the time. Many parents consider it a pleasure. And their children really appreciate this amazing gift from Mom and Dad – the gift of a home.

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