Lending/Gifting $ for daughter's house down pmt?

[someday soon]

Well, the newly married daughter & son-in-law ( would that be DD and DSIL?? ) escaped Brooklyn and are starting life over in our basement apartment for awhile, till they can save up for a house down pmt in our expensive-ish metropolitan area in the western US ( median house price is mid-400s ). In these wild and uncertain times, we are incredibly grateful that they both found new jobs in our community. They are diligent savers and will prob buy their own place within a year.

Relationships are fine -- they are glad to hang out with us awhile and we're glad to have them. But we ( dad & mom ) can't help but think, "hey, maybe we can accelerate their path by helping with the down payment..."

Has anyone here ever ventured down that path?
We're interested in hearing not so much about how family dynamics may be affected ( though that could happen ) ...but more about the financial mechanics:

* gift or loan and why?
* who paid taxes on what ( if any )?
* are there any "gotcha" or helpful laws we should know about?
* did your private gift/loan have to be disclosed in the main mortgage/lending process? ..did it affect the mortgage terms?
* would you change anything if you could have a do-over?

Any and all insights welcome -- and thanks in advance for your collective wisdom!

 

[cathy63]

DH and I were on the opposite side of this when we bought our first home.

* gift or loan and why?
We had saved 10% of the property value for a down payment and we asked FIL (father-in-law) for a loan of 10% so that we would not have to pay PMI on the primary loan. He had previously made loans to some of DH's siblings for other things, so this was an established practice in the family. We paid him the same interest rate as we were paying the bank on the rest of the loan. We had a regular 30 yr payment schedule laid out, but we were able to continue saving and paid off that loan within a couple of years.

* who paid taxes on what ( if any )?
FIL & MIL paid taxes on the mortgage interest we paid to them, and we took the corresponding deduction on our taxes

* are there any "gotcha" or helpful laws we should know about?
can't think of any

* did your private gift/loan have to be disclosed in the main mortgage/lending process? ..did it affect the mortgage terms?
Yes, it had to be disclosed. It was a second mortgage and recorded as a lien on the deed.

* would you change anything if you could have a do-over?
No, it worked out well for us.

 

[rodi]

Similar to Cathy above...

Dad loaned me 10% of my downpayment on my first house, I ponied up the other 10% with the idea of avoiding the PMI.

Interest rate was matched to the first mortgage. We had a full amortization schedule - for 10 years term. I made monthly payments. We did not declare this loan so he didn't claim the interest income, I didn't claim the mortgage interest, and we did not register the loan as a lien on the property.

When I relocated for a job - Dad allowed me to 'transfer' the amount I still owed... and when I asked, he agreed to match the new (lower) first mortgage interest rate. I paid him off early when I got a large bonus at work.

Still grateful that Dad helped me out so I could buy a house earlier than if I'd had to save up all 20%.

Dad did mention that he'd offered a similar deal to my siblings - sis was married and he'd come up with language that he be paid first if they sold for a profit during a divorce... didn't want pesky son in laws benefitting. Sis declined the offer, in part because she didn't like the strings attached. (Sis has subsequently gotten divorced... but it was many years later.) I was single when I took the bank-of-dad loan.

 

[mystang52]

I lent both of my kids money so they could pay off their graduate loans (in each case, they initiated the request). We gifted each $$ for house down payment.

 

[travelover]

Between relatives, I think gifts are best. If you make a loan and they don't repay, it ruins the relationship.

 

[erkevin]

Between relatives, I think gifts are best. If you make a loan and they don't repay, it ruins the relationship.

Yep, that is why, when you loan to friends or relatives, you (internally) consider it a gift. The money is gone. If they repay you, great. If not, you are a damn generous individual!

 

[SecondCor521]

Has anyone here ever ventured down that path?
We're interested in hearing not so much about how family dynamics may be affected ( though that could happen ) ...but more about the financial mechanics:

* gift or loan and why?
* who paid taxes on what ( if any )?
* are there any "gotcha" or helpful laws we should know about?
* did your private gift/loan have to be disclosed in the main mortgage/lending process? ..did it affect the mortgage terms?
* would you change anything if you could have a do-over?

Any and all insights welcome -- and thanks in advance for your collective wisdom!

I was on the receiving end of this in about 1994 and may be on the other end in the next several years with my three offspring.

The 1994 situation was a gift, because my parents were generous and could afford to do so and wanted to do so.

Nobody paid taxes on it; it was less than the annual gift exclusion amount at the time, so nothing needed to be done.

If you're making it a gift, you should be aware of the annual gifting limits and that they are from any person X to any person Y, so between you and your spouse you can give up to 4 times the annual limit by writing four checks - from you to DD, you to DSIL, your spouse to DD, and your spouse to DSIL.

If you're making it a loan, be aware that technically if it's at a below market rate, any difference is technically a gift to them. I doubt many people worry about this technicality.

My mortgage lender at the time required a gift letter from my Dad stating it was a gift, not a loan. This was likely to ensure that our debt to income ratio met their lending limits (which it may have even if it were a loan, now that I think about it). This was annoying to my Dad because it was a hassle and I think he felt it impugned his honesty. He wrote the note anyway.

The mortgage terms weren't affected except in the sense that we were able to swing, with the gift, a 20% down payment, so we were able to avoid PMI. We were also able to get a conventional loan, which as I understand it has better origination terms and lower fees than other low-down payment-cost loans like FHA and VA loans.

I don't think I would do anything differently. My wife and I did end up divorcing about 12 years and three houses later. Since that gift had been comingled with our other finances, I was unable to separate that gift out in the property division, so in a sense my ex got half of that gift, which my parents probably didn't like, but in the big scheme of things it wasn't that much money by then. So maybe consider what you might want to happen with your chosen path if DSIL becomes XDSIL at some point.

I haven't decided how to help my kids with a down payment yet. I had originally planned not to, but looking at my oldest who is a superb saver and investor and will graduate from college with a good paying job in December, and then looking at house prices here, he would have to save like mad for several years, and in that time frame the prices would go up enough to where he would be chasing an ever growing downpayment if he aimed for 20%.

If I help my eldest, I'll obviously treat my other offspring similarly, and how much I help my eldest may be tempered by the fact that I'd want to do whatever it was three times and thus would face three times the amount.

HTH, and good luck.

 

[MuirWannabe]

Somewhat timely.

I just loaned DD/DSIL $24K. They already have a house and mortgage. The money was to pay down their principal to a point they can eliminate PMI.

I guess you call it a loan. Although it’s at zero interest. And although I am certain they will pay it back, I’m mentally prepared either way.

But I feel good they are not wasting money on PMI. It saves them around $8100 in regards to that, and puts all that money towards principal.

 

[Sunset]

My mom loaned me a mortgage for my first purchase, I had the nearly 20% downpayment already.

I feel this was the right thing for many reasons.
It protected Mom in case I was a jerk later.
It protected Mom in case I got married and my spouse was a jerk that divorced me and claimed 1/2 the matrimonial home.

If she had gifted me the money, I might have bought a bigger place which would have been stupid.

 

[MarieIG]

After DH and I saved for a down payment; DF gave us a gift to increase it; and DM gave us a loan. Then DM refused to take the money back.

Yes, it was disclosed.

Would I gift or loan? Gift - set it and forget it. But they would need to save something themselves first.

Tax - No, I would keep it under the yearly limit. There are two of you and two of them. That's 60k in one year. If you want you can gift 60k in December; and another 60k in January.

 

[Souschef]

My parents loaned us some money to buy our first house. i executed a 2nd trust deed to them payable in 5 years.
But, that was 40 odd years ago.
My younger son wanted to buy a home, so i told him i would advance him $250K from his inheritance to buy it. His reaction stunned me, he broke down in tears and had to walk away to collect himself.
I adjusted the beneficiaries on my accounts to reflect this. My feeling was he needed the money now, not when he inherited it.
Frankly, at our age, we have more than we will ever need.
The only issue is I will have to file a form 709 at some point.The exemption at this point is $11.4 Mil

 

[Lsbcal]

We are thinking of giving a helpful gift to our son and his fiancee if they decide to buy a house. They have not yet gotten married because the wedding got canceled due to the virus emergency. They are in love but in marriage limbo.

They would have to decide:
1) Can they keep their jobs in their preferred living location in this environment?
2) Do they want to buy now with all the economic uncertainty?
3) What mortgage loan can they afford?
4) How much down do they currently have?
5) Is the house they could purchase something they really want?

Then we would talk about what we could gift them to help.

 

[RetiredAndLovingIt]

In 2009 when California housing prices took a massive dump I decided to buy a rental home which my daughter wanted to rent from me, she was 20, and it was time for her to leave the nest before we drove each other crazy. Our deal was I would buy the house with a 20% down payment and I titled it in both our names so she could get the interest tax deduction. She would pay the monthly mortgage as her rent which included taxes and insurance and if she was able to repay my down payment with a tiny interest charge within 5 years and refinance the mortgage balance in her name I would sign off and the house was hers. There was also a pretty big first time buyer tax incentive at the time that I would not qualify for but she did. I also had her sign a quit claim to protect me just in case she stopped paying and things turned bad and she was fine with that. All went great, it was very hard for her, she didn't make much and also was a a spender but she chose and loved this house so was determined to make it work. It was quite shocking how cheap she became overnight. With her low income she qualified for some free weatherization/efficiency home upgrades from SoCal Edison including energy efficient bulbs and even a new a/c unit for $500. Her existing unit was 20 years old so could not turn that deal down. Her boyfriend who I considered a real loser that worked at MacDonalds and played video games the rest of the time stepped up to the plate and started learning how to fix things and helped her around the house. Our only argument was that she wanted him to move in after a while to help with the bills and I wouldn't let her do that, I'm old fashioned like that. Within the 5 years, he got a great job, they got married, saved what they needed to repay me, refinanced the mortgage in their names and I signed off on my interest in the house.
No regrets, young people need help and if you can do it, do it.
I charged a small interest amount just so I could show it on the amortization schedule and she could understand that borrowing costs you money. When they paid me back, I deducted that amount from what they owed.
She paid all house expenses and got all the tax benefits as well.
Would do it again in a minute, she learned a lot.

 

[jojo777]

My children are still in high school, however, I raised a niece when my sister passed away when she was 15. She's now 33. We love my sisters kids like our own. A few years back she bough a house. My husband and I gifted her money, as did her father. You do need to disclose it to the lender as a gift and in and the gift has to come from a family member. It does not at all impact the terms of the mortgage, just gets them a better rate with a larger down payment and a lower monthly payment. I'll never regret it, nor do I want it back. My folks also gifted us money when we built our first home.

 

[GSMAN]

My son in law and daughter wanted to move closer to us once they started having kids. My wife and I were glad they were moving out of the city and out to the suburbs. They found a house they liked in our neighborhood but the mortgage was out of their reach. We gifted them a significant amount of money to buy down the mortgage. My wife and I figured that now is the time our kids could use the money when they are young parents not who knows when they will get their inheritance. By the way, they did not ask for the money, we were interested in having a close relationship with our grand kids and it has turned out great.

 

[pb4uski]

No direct experience in that we never borrowed from the bank of Dad (but probably should have or could have but I wanted to do it on our own). I recall just before we got married we looked at a $40k condo that we really liked but it required 5% down and we didn't have $2k to put down (nowadays if our monthly credit card bill is less than $2k I'm thrilled).

Thought about asking Dad for a loan but decided against it. In retrospect it was a good decision in that two years later we bought a house on our own and sold it four years after that for twice what we paid for it and bought another house for 1/2 as much in a LCOL area and the profit from the first house was invested.

Ditto with DD, she did it on her own, though we were going to loan her money for a down payment on one property but the deal fell through. From what I remember, the bank wanted it to be a gift and we signed a paper saying that but had a handshake agreement with DD that it was a loan but with no specific repayment terms. DD is very financially responsible so we had no concerns about getting paid back... in fact, didn't particularly care other than we try to be even-handed with the two kids... if DD hadn't paid us back then we would have just made an equivalent gift to DS.

 

[donheff]

I have given both my son and my daughter $100K toward home down payments.

* gift or loan and why?

We went with gifts because we could afford it; the kids were responsible; better value could be achieved via mortgage than rent in our area; it would have taken them a while to save the full downpayment while maintaining an emergency fund.

* who paid taxes on what ( if any )?

There were no taxes to be paid. Part or all of such gifts will be covered by the gift tax exclusion. In our cases, in any given year it was ~$60,000. Any amounts exceeding the gift tax limit need to be reported to the IRS on Form 709. Those amounts will be counted toward the $10M each inheritance tax limit.

* are there any "gotcha" or helpful laws we should know about?

I don't know.

* did your private gift/loan have to be disclosed in the main mortgage/lending process? ..did it affect the mortgage terms?

We had to sign documents attesting that the amounts were gifts, not loans so they could qualify for the mortgage. This occurs when there is a large contemporaneous influx of funds that are being used for a down payment,

* would you change anything if you could have a do-over?

No. Real estate in our area is outrageously expensive as are rents. DW and I could easily afford to help so we did.

 

[Sunset]

OP - One large "gotcha" in the load vs gift choice, is suppose X years down the road, the spouse decides to divorce or does things so extreme your child feels the need to divorce the spouse.

If you gave a gift, in many places the spouse will get 1/2 your gift regardless of how bad they have been.

A loan is protected from this event.

 

[SpinDoctorTX]

Between relatives, I think gifts are best. If you make a loan and they don't repay, it ruins the relationship.

Exactly. We've gifted $ to relatives when they were in need. Most has been paid back, but we never called it a loan. Debts between friends/ family are just bad. Virtually every time I've done business with one of those, the relationship has changed, and not for the better. We help folks when it makes sense and we can afford to.

 

[pacergal]

We told both of our kids a couple years ago that we would gift them $X amount to help with down payment on a house. Big enough to be a boost, small enough to be under yearly Fed amount so no tax and still requires them to have some skin in the game too.
DD and SIL bought a house last year. DS has not yet.
We also helped DD with some refurbishing costs as the house they wanted and could afford was pretty bad and needed upgrading (kitchen/baths/flooring).

 

[poorcarver]

We loaned approximately $100,000 to our DS and DD, to increase down payment on property. Formal note, and we required DS and DD to each take a life insurance policy which we owned but which they paid, to cover the debt. Older loan will be paid by the year end. I will pay them back their interest. Point of loan was to protect us if spouse became an issue. Will do the same for the other when their note is paid. Did not disclose as the loans were deliberately made well before mortgage application.

 

[Teacher Terry]

In 1980 we borrowed 8k for a home from my FIL. There was nothing in writing, no interest and 6 years later we had it paid back.

 

[pb4uski]

.... small enough to be under yearly Fed amount so no tax ....

I think you misunderstand the rules.... there would be no tax on the gift.... at most, if you exceeded the annual limit you would have to file a gift tax return but no gift tax would be due.

 

[Chuckanut]

Has anyone here ever ventured down that path?
We're interested in hearing not so much about how family dynamics may be affected ( though that could happen ) ...but more about the financial mechanics:

* gift or loan and why?

My uncle helped out his son and new wife by giving them 20K to use as a down payment on a new home. (This was decades ago when 20K was worth 20k). About two years later, his not-so-dear DIL decided she wanted to be with another man. She divorced his son and got the house. In effect he gave 20K to a woman who cheated on his son and then divorced him.

Do it in the form of a loan, all legal and proper. Then you can forgive all or part of the loan, (or just gift them the money to make the loan payments) and if the marriage goes bad, you are not totally in my uncle's sad situation.

 

[GravitySucks]

Anyone very familiar with these rules?
From what I understand I can gift DD $15k. She has no husband and my DW is deceased so that seems the limit under the annual gift exclusion rules.
But under the liftime gift exemption rules it looks like I simply have to report the portion over $15k so it is tracked to be under the $11m lifetime limit.

I want to gift her $25k or so. I will never hit the $11m lifetime limit. So can I just gift her the $25k this year if the home buying opportunity comes up?

I think you misunderstand the rules.... there would be no tax on the gift.... at most, if you exceeded the annual limit you would have to file a gift tax return but no gift tax would be due.