Mike Mondello isn’t just a real estate agent. He’s also a parent. And as a parent, he wants the best for his children. That might include helping them buy their first homes.
Mondello, managing broker of RE/MAX Synergy with offices in Orland Park and Flossmoor, Ill., says he has already begun thinking about helping his oldest daughter buy her first home. She’s in college now but will soon need a place to live. He thinks it makes sense for her to buy that first home now, with interest rates as low as they are.
“The prices are so reasonable. There’s a sale on real estate right now,” Mondello says. “Like a lot of parents, I want my children to be able to take advantage of these great prices and rates. If I can help my children, if I can give them a little boost, why not?”
Mondello is far from alone. A growing number of parents are helping their children purchase homes today, whether they’re buying these homes for their sons and daughters outright, helping them pay for closing costs or coming up with the money for their down payments.
Such gifting is a relatively straightforward process, but both parents and their home-buying children need to know a few rules.
A growing trend
The National Association of REALTORS® reported that one in three first-time buyers received a financial gift or loan from family members or friends to help them purchase a home in 2011.
This is the sign of a solid trend. For instance, the REALTORS® association reported that in 2010, 27 percent of first-time buyers received a gift from a friend or relative to use toward their down payment. That year’s figure was up, too, from 22 percent in 2009 and 23 percent in 2005, according to an analysis by financial news site MarketWatch.
The REALTORS® association’s annual Profile of Home Buyers and Sellers also reported that in 2010, 9 percent of first-time buyers who made down payments received loans from a relative or friend. It’s not a huge number, but it is on the upswing. That number stood at 6 percent in 2009.
This seems to be an ideal time for first-time home buyers. Mortgage interest rates remain at historic lows, with financial website Bankrate.com reporting that the average rate on a 30-year fixed-rate mortgage loan stood at 3.43 percent in mid-October.
The average interest rate on a 15-year fixed-rate loan was even better, standing at 2.82 percent during the same period.
At the same time, homes in the Chicago area remain affordable. Even though the Illinois Association of REALTORS® reported that the median sales price for existing homes in Chicago was up 3.9 percent this September when compared to the same month one year earlier, that sales price is just $200,000.
Nonetheless, today’s first-time buyers face at least one significant hurdle when buying a home: the down payment.
Many conventional lenders are requiring down payments of at least 5 percent. For a $200,000 house, that comes out to $10,000. Buyers who take out mortgages insured by the FHA will only need a down payment of 3.5 percent, but that’s still $7,000. Either way, it’s a lot of money for first-time buyers to scrape together.
That’s where parents often come in, providing their children with enough money to put together a down payment, said Christine Lee with RE/MAX Showcase in Long Grove, Ill.
“Parents know that this is a great time to buy, especially with interest rates being at all-time record lows. They want to help their kids take advantage of this current real estate market,” Lee says. “Parents feel for their kids when it comes to down payments. The majority of parents know how hard it can be to come up with large down payments when you’re young and just getting started with family and career, plus many young people may still have college loans. Parents realize that by providing a little financial assistance they can help their kids make this solid investment of home ownership.”
Home buyers who are relying on gifts from their parents or family members should follow some fairly simple underwriting and IRS rules.
First, parents need to know that they can gift a total of $13,000 a person without being taxed on that money. In other words, a father can provide $13,000 to his son and another $13,000 to his daughter-in-law that the couple can use for a down payment. At the same time, the mother can provide the same amounts to her son and daughter-in-law without having to pay taxes.
Buyers applying for a conventional mortgage loan must use their own funds for at least 5 percent of their down payment. They can then use gifted funds for the rest. As an example, if buyers need $10,000 for a down payment, they would have to use at least $500 of their own money. The remaining $9,500 could come from gifted funds.
When buyers are providing a down payment of at least 20 percent of their home’s purchase price, they can rely on gift funds for the entire down payment. For FHA-backed mortgage loans, borrowers can pay for the entire down payment with gifted funds.
Mortgage lenders will need to see documentation showing the origin of gifted funds.
Because the rules of gifting are relatively simple, and because down payments remain a struggle for younger buyers, Mondello expects gifting to become an even more common event.
“Sometimes these kids come out of college mired in student-loan debt. It’s hard for them to buy anything without help from their families,” Mondello says. “We see gifting a lot on the first-time buyers’ side. If parents have the financial wherewithal to help these young adults get into their first homes, they’re doing it.”