Don’t Look a Gift Horse in the Mouth
March 9, 2012
With the shift in requirements by lenders it has become harder for people to get loans. First time buyers are finding it harder to get loans than their predecessors of just a few short years ago. As such I’ve seen a growing trend as of late where parents are helping their kids purchase by either gifting money towards a downpayment OR co-signing on the loan. In some cases parents are doing both.
I’ve talked to many parents who feel with interest rates being as low as they are and the market at as low a point as it’s likely to go now is a phenomenal time to buy and they want to help their kids in any way they can…within reason. However, with lending rules being tougher than they have been in a while gifting may not be as simple as one might think. My advice, plan ahead. Too many parents assume it to not be a big deal and offer this at the last minute causing issues for the overall loan process which can ultimately delay a settlement and in certain instances kill a deal.
So what should you do if you are planning on going this route. First and foremost discuss this with your lender at the VERY beginning of the process. Depending on what loan program you go with will determine what rules you need to adhere to. In some cases, if you are giving cash towards a downpayment, you may want to deposit that money in your child’s bank account several months prior to going under contract. For some lenders seeing a large deposit during the process raisese a red flag and sets off a huge requirement for paperwork from the parents and the child.
If co-signing expect to pretty much go through the same approval process your child does (ie provide tax returns, paystubs, bank statements etc). I know all this sounds pretty simple and straightforward but you would not believe how many people assume that just because they are in an extremely strong financial position (relative to the small purchase their child is seeking to make) that they will receive an easy approval from the lender.
So plan ahead and start the process early. You’re not only providing a gift for your child that will grow and multiply several fold in value with time but also enabling their first foray into the American dream of home ownership.