In DC’s increasingly competitive market, it’s becoming more common for buyers to have help from their parent(s) to buy a property – especially if it’s their first home. A lot of parents don’t want to see their children spending huge amounts of money on rent for years on end, and consider helping their child buy to be a good investment for both parties.
Many clients know they are lucky to have the help, but they don’t know exactly how to implement it.
There are two ways parents can help supply funds for their child’s home:
- Assist with funding a downpayment
- Co-sign on a loan
If the buyer knows how much they need from their parents at least two months prior to purchase, that money can be transferred into the child’s account, no questions asked. A lender will looks at 2 previous months bank statements. If they do not see a line item for the transfer, the money is considered “seasoned,” and therefore the buyer’s money.
If short on time, the parent will have to supply a “gift letter” to accompany the transfer of funds. The letter is provided by the lender and state that the money is a “gift” and not a “loan”.
When co-signing a loan, the parents will have to join the underwriting process, and will become a co-borrower. They will have to submit the same paperwork as the buyer and be vetted in the same manner.
We always recommend that parents speak with their own CPA or financial planner to make sure there are no unintended tax consequences of their generosity.