Kevin McCormally: I am Kevin McCormally of Kiplinger's. I am here with Pat Esswein to talk about how parents can help their children buy their first home.
Pat in a lot of the country home prices have come down. So young people who thought they will price out of the market, now think they can buy, but they might need a little help from the bank of mom and dad. How does that work?
Pat Esswein: Well, you can actually give your kids money toward their down-payment on their first home.
Kevin McCormally: What do parents need to know about how that works?
Pat Esswein: Well, first of all, so that you don't run a foul of the Federal gift tax rules. You can give, you could actually give any number of people up to $12,000 annually without incurring the gift tax.
Kevin McCormally: So that's $12,000 per child so both mom and dad give son and daughter more money, they could give up to $48,000, so get tax free.
Pat Esswein: That's true.
Kevin McCormally: Is there anything that lender thinks about, about these gifts? Is it okay with the lender that the down-payment is a gift?
Pat Esswein: It's okay with the lender if it's a gift but first of all they want to make sure that it's not really a loan in disguise.
Kevin McCormally: So how do parents prove that?
Pat Esswein: Well, every lender will have requirements or specific requirements for documentation. One thing that they all usually require is a gift letter in which you state, this is a gift, not a loan.
Kevin McCormally: So you say that the kids don't have to pay it back so it's not going to pinch on their ability to pay the lender back.
Pat Esswein: Exactly.
Kevin McCormally: Is there anything else that lenders going to want?
Pat Esswein: They'll probably also want proof of the transfer of funds. So they may want a deposit slip or they may -- if the funds -- if you deposited the funds on your child's behalf, a few months ago, they might want the kid's bank statement since then.
Kevin McCormally: Okay. And is the lender happy with just letting the parents put up all the down-payment money?
Pat Esswein: Not necessarily. Especially in this market downturn, lenders may want the kids to empty up at least some of the down payment money. Their feeling is that that ensures that the kid won't just walk away from the mortgage in default.
Kevin McCormally: Okay. Thank you Pat.
