RISMEDIA, Jan. 22, 2008-(MCT)-The time has arrived in our nation’s history where large dollar amounts of investments and properties are changing hands between aging adults and their heirs. For some who realize the benefit of this transfer of riches this will mean a great deal of extra responsibility. For others it could translate into a substantial down payment on a home. Here are some examples and practical guidance for a smooth home purchase transaction.
One of the first things the benefactor must consider is their potential tax implications. I must precede my comments on this subject with the typical disclaimer, “Please consult your tax specialist before making any financial decision of this sort.” My understanding of current tax law is that it’s OK for parents to gift up to $12,000 to each child and spouse and their children per year. If the married child has two children this could mean up to $48,000 per year without tax consequences to the benefactors.
Secondly, almost all lenders will accept gift funds for either the purchase or the refinance of a home. However you should be prepared for some extra work to satisfy the already curious nature of underwriters. The first thing lenders/underwriters will want is a “gift letter.” This letter is written by the benefactors to the lenders stating the amount of the gift funds and that no repayment is required or anticipated. The specific language of this letter is critical, so check with your mortgage provider before crafting the document.
In addition, the paper trail for the transfer of funds will be required. Here again, different lenders have different requirements so check with your mortgage provider to make certain the transfer is correctly documented. In most cases a copy of the gift check is required as is the deposit slip and/or bank statements showing the deposit of gift funds.
While most lenders have no problem accepting verification of gift funds for down payments, some may require the actual borrowers — the children — to ante up some of their own money. Their thinking is that the more skin in the game they have, the less likely they are to simply walk away from the home when times get tough.
Most lenders allowing gift funds for a home purchase require these funds to equal at least 20% of the purchase price. Some families gifting these monies will divide up the funds, gifting some in December of one year and January of the next year maximizing their gifts to children and allowing them to use the funds for the required 20% down payment.
If you choose to gift funds to children so they can show reserves, or savings, and perhaps qualify for a better loan and/or rate bear in mind that all lenders will require these funds be seasoned for at a minimum of 90 days. Be sure to transfer any gift funds that will be used for reserves well in advance of this window.
If there are plans to use the bank of Mom and Dad to help children with the purchase of a home, it would be a wise move to contact both your tax accountant and your mortgage provider well in advance of the transaction. This way your personal interests as well as those of your children will be best served.
Copyright © 2008, The Edmond Sun, Okla.
Distributed by McClatchy-Tribune Information Services.
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