Conceptually, the easiest approach is to gift the amount needed to purchase the house and finance the rest needed through traditional financing, or simply gift the entire purchase price. If a parent is considering contributing just the down payment,
they might be looking at between 10% and 20% of the purchase price. Traditional financing will be needed for the remaining portion of the property. Will the purchasing child have the credit to secure a mortgage of the size needed, and will the interest
rate be low enough and payments reasonable enough to justify the purchase? Typically, the higher the down payment, the better the interest rate per Rocket Mortgage.
A larger down payment can result in avoiding private mortgage insurance (possibly a few hundred dollars extra on the monthly payment for a few years) and result in lower mortgage payments and less interest paid overtime, which can be especially beneficial to the long-term bottom line. It also will affect the child’s purchasing power – the higher the down payment, the higher the value of the house that can be bought.
There is a requirement to be transparent with the lender regarding the amount received as a gift – that it is, in fact, a gift and not a loan with a subsequent obligation to be paid back.
Some lenders require a letter confirming this information, which should include the name, relationship, mailing address and phone number of the donating parent , as well as the amount of the gift and confirmation that the gift does not need to be repaid.
If the parent has the means and is willing to assist with the entire purchase of the house, no traditional financing is needed, and none of the above requirements need to be contemplated. But moving such a large amount of liquidity off the balance sheet, even if one had the means to do so, could require some significant financial and tax planning, unless the amount is sitting in cash or can be accessed without incurring significant tax liabilities.
https://www.rocketmortgage.com/learn/what-is-a-down-payment
https://money.usnews.com/loans/mortgages/articles/what-to-know-before-gifting-a-down-payment
For example, if the amount needed to purchase a home is $500,000, and the parent is willing to part ways with this from their net worth, an assessment should be done by the gifting parent on whether this amount is critical to funding living expenses now or in retirement.
A careful review of the balance sheet should be performed to understand liquid and illiquid assets. A cash flow analysis should be initiated to review available inflows to fund living expenses now and in retirement.
The parent should know what the expected rates of returns might be for the remaining investments, what the expected withdrawal rates from illiquid assets will be in retirement, and available sources of income or cash to replace the $500,000, if this amount would be critical to a successful retirement plan.
For some, the $500,000 gift might be of no consequence. For others, a careful analysis should be done to make sure the parent is not gifting away a portion of their financial security.