As a first-time homebuyer you can face the daunting challenge of saving for a down payment, which can be a major obstacle to owning a home. In these situations, parents often offer essential financial assistance. By helping with the down payment, parents can make it easier for you to obtain a mortgage and potentially secure more favorable interest rates. This aid not only reduces some of the financial burden but also enables you to enter the housing market sooner than you might have been able to on your own.
I hope these strategies inspire you!
AGREE TO A DOWN PAYMENT LOAN
Anyone, your parents, grandparents, etc. can lend you money. It is easy for both sides to forget the details of an informal conversation or lose sight of the balance owing.
Best Practice: work with a lawyer or notary to have a proper loan document, a Promissory Note, prepared and signed. It includes:
The amount of money,
The interest rate will be, and
When and how the repayment will take place
Also, expect both parties to record payments to authenticate the loan; this ledger may be needed for estate planning or court proceedings should there be a relationship break down. The lender can “forgive” the loan at any time and address the details in their will. Please note the lender is responsible for declaring interest earned on the loan on their tax return.
ACCEPT A DOWN PAYMENT GIFT
Typically a “gift” can come from any member of your immediate family such as parents, grandparents, aunts or uncles, and siblings. This money is not paid back and is not considered your taxable income. There is no limit on the amount of the gift.
Best Practice: draft a “gift letter”. It may be required by your lender as verbal arrangement are not likely enough. It includes:
The gift recipient’s name;
The amount of the gift;
The date of the gift;
The property being bought;
Name of the donor, along with their connection to you;
The donor’s contact information and proof of funds.
The fact that is it a gift for a down payment with no repayment required;
Before you ask consider:
When they gift you money they may still be able to influence how the money is used so set conditions in the gift letter.
They may need to think of how to provide equal treatment to your siblings. They won’t want to create feelings of resentment and cause family conflict. Give them time to work it out.
They may need to speak with a financial advisor or tax professional to understand any potential tax implications.
Good news for them:
Gifts made during their lifetime can reduce their estate tax liability, which can be especially beneficial if they have a large estate.
It may bring them satisfaction and pleasure as it allows them to see the impact of their generosity and help you achieve your goals.
The donor can set up a trust for you, which would provide ongoing financial support while still allowing them to retain control over the assets.
A Slow Gift Option: The donor can gift you money that you can add your FHSA.
ARRANGE A DOWN PAYMENT AGREEMENT
Co-signer
If you have irregular income because you are a consultant or freelancer, your parents or established adult can co-sign for a mortgage.
You make the payments.
The cosigner is also legally responsible for the mortgage debt.
The cosigner shares ownership rights in the property.
Both incomes and credit histories will be considered during the process.
Guarantor
If you have insufficient or a poor credit history, your parents or another established adult can become a guarantor for your mortgage.
They aren't responsible for repayment, BUT they are liable if you default.
They are not on the title.
They are often not required to sign all of the mortgage paperwork.
Best Practice: exercise patience and graciously respect their right to decline the request. Don’t be surprised if they won’t go along with this plan. These options carry significant risks. In either case, if you are unable to make the payments, they will be obligated to cover them. The lending institution may pursue action against both you and your donor, affecting everyone’s credit scores.
These generous gestures can enhance family relationships and cultivate a collective commitment to the future. Nonetheless, it is crucial for families to discuss the terms of this support openly to guarantee that expectations are understood and that the arrangement does not result in future misunderstandings.
Although this is the final post in the 10-Part Mortgage Series, you can find inspiration and motivation to proceed with the next steps. As an independent planner, I have the unique ability to offer insights that other professionals might overlook.
As parents, it is vital to ensure your retirement plan stays secure. Reach out to me, a Registered Retirement Consultant (RRC®), professional Financial Planner, Insurance Agent, and Myers-Briggs Coach, to create the best plan for you.
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