How Family Money Can Help You Buy a Home

How Family Money Can Help You Buy a Home

If you’re a buyer on a tight budget, your family may be able or willing to help you with your downpayment. If that’s the case, lucky you! 

I know financial support from family is not an option for every buyer and I have many articles about other options on my website, but if you do fall into the category of getting downpayment money from your family, this is a useful guide. 

First thing to decide:  should you or shouldn’t you accept their help?

It’s help that many first-time buyers do welcome, especially if coming up with a down payment is going to delay purchasing a home.

If you have willing family members who have the finances or who may want to see you enjoy your inheritance now, then it’s worth the time to see if this is a viable financial option for you (and them).

You and your family members will want to consult with experts on tax law and real estate law so that all the “i’s are dotted” and the IRS won’t be questioning your agreement.

It’s a Gift  — $15,000 tax free!

(Important Note: Please keep in mind these figures are based on year 2020 and 2021, but they are subject to change every year.)

A gift is just that, a present with no strings attached. It’s not a loan at all or even considered income. And you do not have to pay back anyone. Ever.

And, yep, you and your spouse could get up to $120,000 in one year combined. That could be a nice addition to your down payment and/or closing costs.

However, you and your parents or other family members still need to follow some guidelines to avoid any tax implications and still meet the loan requirements. 

Of course, check with your own accountant to double check your specific tax implications, but a general rule of thumb is:

• Each person can give another person up to $15,000 in a calendar year without facing a gift tax.

• If a couple who is buying a house each has both of their parents alive, they can get $120,000 total – each parent can give each of them $15,000. For example, Susie’s Mom can give Susie and Joe each $15,000, and Susie’s Dad can give them each $15,000. Joe’s parents can do the same.

• If the gift is recent and is for the sole purpose of buying a home, the loan officer will request a signed agreement from parents stating that they have given their child a specific amount of money as a gift and don’t expect repayment. We have formatted letters available for this.

The reason for the signed agreement is to prove the origin of this new lump sum of money, which is usually put toward a down payment and/or closing costs. And also, to fully understand the borrower’s complete finances, and this letter assures them that you are under no obligation to pay back this gift.

Parents or a family member can send the money directly to the settlement agent. That amount needs to match the amount stated in the letter. Many family members who lend money this way are happy to know that they are helping you buy a home and have some control over where the money is going.

I’m not a licensed accountant, so be sure to check with yours about what the tax implications might be for you and your family for your specific situation.

Early Inheritance

If you and your parents are really organized, the tax-free gift giving can start earlier. With some preplanning, your parents can each gift you $15,000 per year over several years into an account in your name.  Or double that if you’re married!

In this situation, the gifted money can become more “seasoned” in your account, well before you even start looking for a home. It essentially becomes your money after it has seasoned in your account for at two months or more, so usually not as much paperwork is required.

However, the potential downside for your parents or other family members is that they now have no control on how you spend this money. It might not ever be used for a down payment on a home at all. It’s really up to you.

But that’s a serious family discussion that you need have if you all decide to go this route. It’s important that everyone understands all of the potential scenarios to avoid any family regrets over this gifted money or early inheritance.

If you are expecting money from family to help you with your home purchase and you aren’t sure how to start planning or where to start, email me at jeng@firsthome.com