Should you gift your child a down payment?
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Homeownership is a route to building wealth, and gifting a down payment to your child can help set them on the path. Before committing to a down payment gift, however, carefully consider the impact on your own finances.
What to know about down payment gifts
The practice of gifting a down payment to a child is fairly common. In fact, 28 percent of buyers used gift funds from family or friends for a down payment in 2021, according to the National Association of Realtors. Many of the adult children who receive a down payment gift are given the funds for major milestones, like graduating college or getting married.
For parents, making a down payment gift represents one of many ways to transfer wealth, often with fewer tax implications.
For tax year 2022, you and a spouse can each gift your child up to $16,000, for a total of $32,000, without triggering the gift tax. There is a lifetime exemption beyond this, however (at the federal level, $12.06 million in 2022), which means even if you give your child more than the annual limit, you likely won’t have to pay gift tax anyway. (The exception might be if your state imposes estate or inheritance tax.) As with any major financial move, speak with your tax professional to learn what’ll apply to your situation.
Gifted funds aren’t a problem for mortgage lenders, either — you can even gift an entire down payment instead of a portion. However, your child’s lender will take steps to ensure the money came from a legitimate source and that you don’t expect to be paid back, so you’ll need to be prepared to cooperate in that process.
Should you gift your child a down payment?
Particularly in an environment with high rents and student debt burdens, it’s challenging for young people to save for a down payment. Helping your child buy a home can get them started building equity sooner, contributing to their long-term financial wellbeing.
“Gifting a down payment can be a very smart thing to do that benefits your kid for the rest of their life,” says Chaim Geller, CEO of HelpMeBuildCredit.com.
Gifting a down payment could also be a better alternative to co-signing your child’s mortgage. If you co-sign the loan, you’ll be on the hook for the payments if your child can’t make them, but you won’t have any stake in the home.
“Making a gift is much more predictable than co-signing and is very different than having your credit liable for 30 years,” says Geller, referring to the typical mortgage repayment term.
Even if your child is financially stable now, they could lose their job or encounter other hardship in the future. If you’re retired or close to it, you might not be able to shoulder that cost on a fixed income.
“[Co-signing] is a valid way to finance homes, but where possible, gifting is a less risky option,” says Dan Green, CEO of Homebuyer.com.
Consider, also, why your child needs help buying a home. Your support might not be enough for them to become a successful homeowner if they aren’t financially literate or responsible in general, for example.
“If the kid needs a co-signer or help with down payment, the parents should always sit down, review their finances and learn their plan for making the payments,” says Geller.
“Kids may dream big, and that may be unrealistic. Understand how much they’re planning to buy, how much the monthly payment will be and how they’re going to support the purchase.”
Keep in mind that if you’re not comfortable co-signing, it’s perfectly OK to say no.
“Saying ‘yes’ may be much more expensive than ‘no,’” says Geller. “Saying ‘no’ may cause you aggravation temporarily, but if the kid buys a house they can’t afford and the house goes into foreclosure, the parents’ credit will be destroyed, and the relationship will be much worse off due to the co-signing going wrong.”
How to gift a child a house down payment
1. Check your emotions
If you’d like to help your child with a down payment, avoid emotional decision-making. Carefully evaluate how much you can realistically afford. You don’t want to withdraw money from a retirement or savings account or life insurance policy, for example, if it’ll mean financial issues for you now or down the road.
2. Make your gift early
To gift a down payment to your child, you can send the money straight into their bank account via online or wire transfer or check. Do this at least two months before your child intends to apply for a mortgage. That way, the funds have time to “season,” in lender parlance. This helps verify that the funds came from a valid source.
“The funds will have to be tracked or ‘sourced,’ to use the industry term,” says Green.
3. Organize your paperwork
You’ll need to write a down payment gift letter to your child’s lender that includes your name (and your spouse’s name, if applicable) and contact information, the gift amount and intended purpose of the gift. Along with the letter, you’ll also need to provide account statements showing the movement of the funds.
Other ways to help your child buy a home
- Allow your child to rent a room at home at a discount — or for free. If you’re fine with your child living with you and have the space, you can help boost their down payment savings by offering a room in your home, either at no cost or for below-market rent. If you choose to charge rent, establish an agreement around how long they’ll rent from you, as well as any other household expenses you’d like them to contribute to during their “lease.”
- Buy the home, then have your child repay you. This option could simplify the process for your child, but it’s still a complicated situation. “That kind of transaction should only be done with the help of the attorney and not on an informal basis,” says Green. “When the homeowner goes to sell, they’ll be unable to obtain a clean title if they find out that you did something wrong. Consult a real estate attorney and don’t take shortcuts.”
- Help with the home search. As a first-time homebuyer today, your child is facing limited options at high prices, and it could take a while to find a home. If nothing else, be of support to them in their search. “The homebuying process can be very tedious, and giving them a backbone could be very helpful,” says Geller.