Gifting An Adult Child A Down Payment | Bankrate (2024)

Homeownership is a route to building wealth, and gifting a down payment to your child can help set them on the path.

The practice of gifting a down payment to a child is fairly common. In fact, 22 percent of first-time homebuyers used gift funds from family or friends for a down payment in 2022, according to the National Association of Realtors.

Before committing to a down payment gift, however, carefully consider the impact on your own finances.

What to know about down payment gifts

A down payment gift is like any financial gift from parent to child —Many of the adult children who receive a gift are given the funds for major milestones, like getting married or moving to a new city for a job. It’s just one ear-marked for the down payment on a home.For parents, making a down payment gift represents one of many ways to transfer wealth, often with fewer tax implications.

Gifted funds aren’t a problem for mortgage lenders, either — you can even gift an entire down payment instead of a portion. However, your child’s lender will take steps to ensure the money came from a legitimate source and that you don’t expect to be paid back. So you’ll need to be prepared to cooperate in that process.

For parents, making a down payment gift represents one of many ways to transfer wealth, often with fewer tax implications.

How to avoid the down payment gift tax

For tax year 2023, you and a spouse can each gift your child up to $17,000, for a total of $34,000, without triggering the gift tax. There is a lifetime exemption beyond this, however (at the federal level, $12.92 million in 2023), which means even if you give your child more than the annual limit, you likely won’t have to pay gift tax anyway. (The exception might be if your state imposes estate or inheritance tax.) As with any major financial move, speak with your tax professional to learn what’ll apply to your situation.

Should you gift your child a down payment?

In this era of high rents, pricey homes and student debt burdens, it’s challenging for young people to save for a down payment. Helping your child buy a home can get them started building equity and owning a key asset sooner, contributing to their long-term financial wellbeing.

“Gifting a down payment can be a very smart thing to do that benefits your kid for the rest of their life,” says Chaim Geller, CEO of HelpMeBuildCredit.com. “Making a gift is much more predictable than co-signing [for a loan] and is very different than having your credit liable for 30 years” (the typical mortgage repayment term), he adds.

Consider, though, why your child needs help buying a home. Your support might not be enough for them to become a successful homeowner if they aren’t financially literate or responsible in general, for example.

How to gift a child a house down payment

1. Carefully consider what you can afford to give

If you’d like to help your child with a down payment, avoid emotional decision-making. Carefully evaluate how much you can realistically afford. You don’t want to withdraw money from a retirement or savings account or life insurance policy, for example, if it’ll mean financial issues for you now or down the road.

And don’t give blindly. “The parents should always sit down, review [the child’s] finances and learn their plan for making the payments,” says Geller. “Understand how much [house] they’re planning to buy, how much the monthly payment will be and how they’re going to support the purchase.”

2. Make your gift early

In making a gift down payment, it’s best to give the money directly to your child, rather than pay the home seller yourself. You can send the money straight into their bank account via online or wire transfer if you prefer that to a paper check.

Do this at least two months before your child intends to apply for a mortgage. That way, the funds have time to “season,” in lender parlance. “The funds will have to be tracked or ‘sourced,’ to use the industry term,” says Green. A two-month window gives the sum time to appear on several bank statements, and the lender will consider the money as legitimately a part of the child’s assets.

3. Compose a gift letter

You’ll need to write a down payment gift letter to your child’s lender that includes your name (and your spouse’s name, if applicable) and contact information, the gift amount and intended purpose of the gift. Along with the letter, you’ll also need to provide account statements showing the transfer of the funds.

Other ways to help your child buy a home

• Buy the home, then have your child repay you. This option could simplify the process for your child, but it’s still a complicated situation. “That kind of transaction should only be done with the help of the attorney and not on an informal basis,” says Green. “When the homeowner goes to sell, they’ll be unable to obtain a clean title if they find out that you did something wrong. Consult a real estate attorney and don’t take shortcuts.”
• Co-sign the mortgage application. This can boost the child’s chances of securing financing. Bear in mind that it means you won’t have any ownership stake in the home, but you’ll be on the hook for the payments if your child can’t make them. If you’re retired or close to it, you might not be able to shoulder that cost on a fixed income. Co-signing “is a valid way to finance homes, but where possible, gifting is a less risky option,” says Dan Green, CEO of Homebuyer.com.
• Become a co-borrower on the mortgage. Also referred to as a co-applicant, this status is similar to being a co-signer, but it gives you co-ownership to the home. However, it also gives you more paperwork and liabilities: The lender will consider your assets, credit history and income as part of the application. It will also consider you equally responsible for the debt — not just if the child falls delinquent.
• Help with the home search. As a first-time homebuyer today, your child is facing limited options at high prices, and it could take a while to find a home. If nothing else, be of support to them in their search. “The homebuying process can be very tedious, and giving them a backbone could be very helpful,” says Geller.
• Allow your child to rent a room at home at a discount — or for free. If you’re fine with your child living with you and have the space, you can help boost their down payment savings by offering a room in your home, either at no cost or for below-market rent. If you choose to charge rent, establish an agreement around how long they’ll rent from you, as well as any other household expenses you’d like them to contribute to during their “lease.”

Additional reporting by Sean Jackson