Can your parents pay the down payment on your house?
January 16, 2012Family Law
Many first time home buyers face a dilemma: They’d like to avoid paying for mortgage insurance, but can’t come up with the 20% down payment required to do so.
For many people, that means biting the bullet and adding an extra $80-$100 per month to their mortgage payment to cover the cost of the mortgage insurance. So long as you make the necessary mortgage payments, eventually that insurance coverage is no longer required. But at the end of the day, that’s money you’re just throwing away.
So where do young couples find the money to put down 20%? Most commonly, from their parents.
So can your parents just pay your entire down payment? Technically, yes, but there are some things you need to do to do it right.
First, there’s something called the “gift tax.” If you receive a gift of more than $13,000 from any one person, you have to pay tax on that gift. $13,000 will certainly be a good start towards a 20% down payment. If your parents are able to give you more than $13,000, then you can split up the gift: each parent can give $13,000 to each child. So both of your parents can give $13,000 to you and both can give $13,000 to your spouse, so in actuality, your parents can make an outright gift of $52,000 to you without you having to worry about paying taxes on it, so long as your transactions are in order.
Second you need to think about “seasoning” the money. Typically banks want to see about 5% of the purchase price of the house in your back account for 2-3 months prior to you purchasing a home. Basically they want to know that you’re able to hold on to your money and don’t just spend it as soon as you get it. So if you’re thinking about buying a house later this year, now is the time to talk to your parents about whether or not they can help you out.
As an alternative, some people will have their parents co-sign the mortgage documents. That way you don’t have to worry about gift taxes or seasoning your money. But before having your parents co-sign, you should think about: (1) How is this going to affect my relationship with my parents/siblings? (2) If you need a co-signer, can you really afford the house you’re trying to buy?