When obtaining a home loan, you’ll receive two important documents from your lender: a loan estimate and a closing disclosure. On the surface, these documents are very similar, but they both serve different purposes. Here’s what you need to know about the differences between these two forms and what each means for you:
Gifting a down payment to your adult child for their first home
According to the National Association of Realtors, parents gifting money to their children to help purchase a first home is a common experience. Gifting money is a type of down payment assistance that can help them realize their dreams of homeownership.
Talk to a tax professional
Depending on the amount you plan to gift, you may or may not have to pay a gift tax. According to the IRS, any down payment gift below $16,000 doesn’t have to be reported. Before you gift a down payment to your adult child, consult with a tax professional to understand how it could affect your finances, especially if you plan on gifting more than the minimum.
Make your decision to gift a down payment early
The sooner you decide whether to gift your adult child a down payment, the better. The lender must know that the borrower has money for the down payment. It’ll also give the money time to “mature” and show the lender that it’s from a legitimate source.
Write a gift letter for the lender
When you make a financial gift, the lender will want to know where it came from. Therefore, you’ll need to write them a gift letter. Again, from the IRS, the gift letter should include the following:
- The dollar amount of the gift
- The date the funds were transferred to the recipient
- The donor’s signed statement that no repayment is expected
- The donor’s name, address, and phone number
- The donor’s relationship with the borrower
- The donor’s connection to the buyer
- The address of the property being purchased
When you gift a down payment, understand that your child doesn’t need to pay it back. Otherwise, it’s a loan, and the lender must consider that when calculating the borrower’s debt-to-income ratio. Being honest with the lender about where the money comes from will make borrowing easier.
Have questions about gifting a down payment to your adult child for their first home? The experts at SmartMortgage.com will help guide you through the process and eligibility requirements.