Everyone seeks to accomplish the American dream and become homeowners one day, but what do you do when your parents offer to help make this dream a reality? Do you happily accept the offer or hesitate because you don’t want to feel indebted? Explore these four ways your parents can help get you into your first home in this RealEstate.com by Dana Bull.
Q: My parents want to help my wife and I purchase a house. Should we take them up on their offer and how do we go about it?
A: Long gone are the days of your parents dishing out lunch money and stipend allowances. Now there’s bigger financial fish to fry. Even after you’ve left the nest, parents never stop being parents and what do you do if they graciously offer to help you with your home purchase?
There are many reasons mom and dad want to lend a helping hand. What’s their motivation? For one, they love you and want to give you the monetary head start to live out the American dream. If your parents own their own property, chances are they want to see you follow in their footsteps, settle down and start cranking out grandchildren. Some may even feel empowered by having the ability to still provide for their adult children and give them a shot at a lifestyle they may not be able to afford on their own. Also, let’s not forget that there could be some tax advantages if the gift is structured appropriately.
So, what are some common ways to go in on a deal with your parents?
1. Gift Contribution Toward the Down Payment
If you’re strapped for cash, but otherwise financially qualified and in a solid position to keep up with monthly mortgage payments, you may only need help with the down payment. Most lenders allow borrows to use gift money from a family member for a portion of the down payment. This scenario is relatively straightforward and will require a gift letter from your parents and proof of funds.
A few things to note when receiving gift money: Typically the banks will only let it slide if you are looking to owner occupy the property, meaning you’re not using the real estate as an investment by renting out the space. Gift givers should also know that the IRS has a max annual tax exclusion of $14,000 per recipient annually.
2. Providing a Loan
If your parents have deep pockets, but aren’t exactly keen on gifting you the money outright, they may be interested in providing you with a loan. Rather than securing a mortgage from a traditional lender, you tap the bank of mom and dad. This can be a win-win for both your parents and for you. The idea is that you would pay interest on the loan just as you would with a conventional mortgage. This interest provides your parents with a reoccurring revenue stream. Assuming your parents have liquidity to make the funds available, you can position your offer to purchase a property without a mortgage contingency. Not only does this approach eliminate the red tape associated with working with a conventional lender, waiving the financing contingency will also strengthen your offer.
Before you start wheeling and dealing, you’ll want to speak with an accountant. Keep in mind that even family loans are subject to IRS scrutiny and your parents will have to report interest payment earnings as taxable income just as they would with any other interest bearing investments.
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