Down Payment For A Home

If only we had enough for the down payment; if only we could put some money down so our monthly payments were manageable; if only we had money set aside for closing costs. Nobody wants to be a victim of the ‘if-only’, particularly when trying to buy a home.
Frequently, a one-time gift of money from parents or other relatives can break the “if only” spell.
“I always urge clients to ask their parents,” says mortgage broker Rebecca Bruner. “It’s one of the best things, I think, that a parent can do for a child.”

Nor are such gifts the sole province of deadbeat adult children, grown-up kids who just never got out of the allowance habit. With the average home price in the East Bay hovering around $450,000 to $500,000 or more, hard-working adult children are looking to their parents for the additional help that will take them from hopeful owners to homeowners.

“There are a lot of people buying homes with 100 per cent financing,” Bruner explains. “And some people have money in the bank, but don’t want to use it,” she adds, since a home purchase often means remodeling, repairs, and other expenses.
Some buyers will need to be careful, however, about the amount of that check. “Some 100 per cent loans will not allow the buyer to have more than, say 5 per cent in the form of a gift,” Bruner explains, “because the lender’s liability increases. In general, the higher the percentage of financing, the more stringent, the higher likelihood of limits on gifts.”

But don’t just walk away with the check, either, notes mortgage broker Kyree Klimist. “The most important thing is that the lender recognizes the money as a gift, and not as a loan, so there’s always a letter, stating that the money is a gift and requires no repayment.”

If Mom and Dad are a bit reluctant to put forward the letter, the buyers also have the option of leaving the money in their savings or checking account for a set period – usually one to three months – to reduce the likelihood such documentation is needed. This is referred to as “seasoning” the monetary gift.

That might be an important step to plan for, says mortgage broker Julia Demeter. “Depending on the financial and family situation, it is one thing for Mom and Dad to say, ‘Here’s how much we are willing to give.’ Then, the bank will want to see a gift letter, and in some instances, will want to know where the money is coming from,” she explains. “Parents are often hesitant to provide that kind of information, so kids need to find out how much documentation is required.” If the parents are uncomfortable undergoing the requested documentation, then the seasoning process is a reasonable option.

Such a process also helps eliminate complications in special circumstances, such as when a non-relative offers the money. While you may know and love her as your favorite Aunt Nellie (who is not actually an aunt, but the dear neighbor of your childhood), lenders are more likely to scrutinize such a transaction. “The lender is going to be asking, ‘Why are they giving this to you?’ Then they will be asking where the money came from, too,” Klimist notes.

Regardless of how it’s done, Bruner says it is important to have the money ready to go before the buyers apply for financing. “You want to have it in place so you know, from the outset, what you can afford.”

Bruner notes that it is a smart move on the part of the parents, too. “Homes just keep going up, up, up, and the housing market continues to climb. So it’s a good thing to provide the money now, when the child needs it, instead of waiting.”
In some instances, Mom and Dad may be more involved than simply writing a check and a letter. “Some parents may do an equity share, and may actually become co-borrowers or partners in the home,” Bruner explains.

Outside of the family circle, buyers might also look to sellers for additional funding, although such a move is decidedly riskier. “If you’re the only one with an offer, perhaps it is worthwhile, particularly if the money is to replace carpeting or address a specific maintenance issue,” Bruner explains. By contrast, buyers will probably lose out in multiple offer situations if they ask for seller credits, since it is one more item the seller must accommodate.

Such a strategy may work particularly well, Bruner notes, “if the house is not at the top of the market. Sometimes, sellers don’t have the funds, or don’t want to think about having to do work on the house.”

By asking for, and receiving, a credit towards repairs, Bruner says that, “both parties can be happy. The sellers don’t have the hassle of making repairs, and buyers can repair or replace an item, as well as gaining some extra money at the time of the purchase.”

In spite of the potential hurdles, however, even a relatively small gift can make a large difference to would-be homebuyers. “Even a gift of five per cent down can give borrowers a lot of options in terms of pricing,” notes Demeter.

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