There are many ways to help your children enjoy the benefits of home ownership, some involving financial participation, and others as inexpensive as offering words of advice. While you probably know the ins and outs of obtaining a home, no one ever gave your kids a class in how to do this. The vocabulary terms, the technicalities of down payment, etc. are all a foreign language to them. Here, Mark Wells at Preferred Financial Services, Inc. answers questions about how to best offer the young people in your life what they really need to move them towards home ownership.
If I want to help financially, what is the best way to do it?
Programs like FHA allow the entire down payment to come from a gift. But conventional loans require that the borrower have at least 5 percent of their own ‘saved and earned’ funds before any gift funds can be used. However, a loophole in the guidelines states that any money that has been in your child’s bank account for at least 60 days before they apply for a mortgage loan, is considered ‘earned and saved.’ So if you are going to make a gift, make it early—at least 60 days before they begin house hunting.
How does the IRS treat that gift?
They treat it as a tax-free gift, but limit the annual amount to $14,000 per person (as of 2016). If your child is married, you can give $28,000 to them as a couple.
What if I want to give them more?
Is there a way to do it tax free? You can declare any amount you may want to give them above the annual gift limit as a pre-estate distribution. Under a pre-estate distribution, the amount is not subject to tax at the time it is given, but the amount given is added back to your estate value when your estate is probated. It therefore might become taxable at that time, if your estate exceeds the IRS exemption amount, but it may not be taxable at that time if your estate is within the IRS exemption limits.
If I go on title with them, can I contribute to the down payment without it being a gift?
Yes, you can go on title, give them any amount, and that is not a gift. However, if you ever depart from title, if you leave that original amount in the house, then it becomes a ‘gift of equity’ at that point, and falls under the IRS gift rules. For loan qualification, if you are not on the mortgage but are on title, the LENDER’S rules still follow the guidelines answered in the first question above.
Does it ever help for me to just co-sign with my child?
Yes, in some cases. Under current guidelines, a co-signer cannot help overcome credit weakness of the child. If your child’s credit does not meet the standard lending threshold requirements, your co-signing will not help them get approved. However, if your child has debt-to-income ratio issues (due to student loans, or irregular income), your co-signing can make all the difference in the world.
Mark welcomes questions and comments, and can be reached daily at (864)-235-9596, or by email at:
Mark@TheGreatestRates.com.
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