Financial experts say that parental help is best when the money is a gift, with no expectation of repayment. That is because loans from family members can create extra hurdles when a home buyer applies for a mortgage.
Lenders typically view a family loan as another burden that could affect a borrower’s ability to make monthly payments, said Tom Wind, executive vice president of residential and commercial lending at national lender EverBank (EVER -0.13%) . In fact, a loan from a parent could raise a borrower’s debt-to-income ratio sufficiently to result in disqualification for a mortgage, he added.
Parental loans also fall under the category of unsecured debt, meaning that no asset is acting as collateral, which can pose a lending risk. Edward J. Achtner, Bank of America’s (BAC -0.45%) senior vice president in north California and Oregon, said his company generally doesn’t allow unsecured debt—such as credit-card advances—as a funding source for a jumbo mortgage down payment, Mr. Achtner said. To be considered, a loan from a relative would have to be secured with collateral such as a traditional secondary mortgage, counted toward the maximum loan-to-value ratio, and included in the underwriting process, he said.
Gifts—with no strings attached—are a different matter. Even then, EverBank and other lenders typically like to see home buyers contribute at least 10% of the loan amount to the down payment. “We are looking for borrowers to have their own equity in the transaction because that’s an indication of their ability to manage their own finances,” Mr. Wind said. “If someone is coming to the closing with a down payment that is all gift money, we’d consider it, but only on a case-by-case basis.”
Bank of America generally requires borrowers provide at least 5% of the loan amount, Mr. Achtner said. And gift money is only acceptable for a down payment on a primary residence and not a second, vacation or investment home, he added.
In making a family gift, the key is for the borrower to have the right documentation, including a letter that clearly states the gift amount and that the gift-giver doesn’t expect repayment, Mr. Achtner said. In addition, lenders require written proof that the money has been transferred from the relative’s bank account to the borrower’s bank account or, alternatively, are given a copy of a certified or cashier’s check, he added.
“If one has prepared for the gift correctly, it really doesn’t impair the mortgage process at all,” Mr. Achtner said.
About one-fourth of all first-time home buyers receive some down-payment assistance from relatives, most commonly, parents, according to a National Association of Realtors survey of people who purchased homes from July 2011 to June 2012.
Buyers seeking jumbo mortgages—loans above $417,000 in most parts of the country and $625,500 in high-cost areas—may especially need the help. Not only is the loan amount higher, jumbos also typically have higher down-payment requirements—at least 20% of the loan amount.
Rising property values are also driving more parents to pitch in on down payments, especially in high-price home markets such as parts of California, Mr. Wind said. “Assuming the borrower can afford the monthly payment, it’s a way for a child to take responsibility but for parents to help out,” he added.
A few more considerations when seeking help making a down payment:
• Don’t forget tax rules. An individual gift of $14,000 or less is tax-exempt, but gifts that exceed the $14,000 annual limit must be reported to the IRS. Each parent can give $14,000 to a child and his or her spouse, for a nontaxable sum of $56,000.
• Stick to close family members. Lenders generally won’t allow down payment gifts from distant relatives or unrelated parties, such as a builder.
• Gift rules are looser with an FHA loan.Federal Housing Administration mortgage limits go above regular jumbo limits in some high-price areas and allow borrowers to use a gift for the full down payment.
Corrections & Amplifications
An earlier version of this article stated that gifts that exceed $13,000 a year must be reported to the IRS. The agency raised the limit to $14,000 last year, effective for the 2013 tax year.
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