The Australian real estate market is very tough for first-time buyers right now, so a home deposit is one of the kindest things a family member can give. But it’s not as easy as it might seem to give your child cash to buy a house up front. How do gifted deposits work?
Before you open the Bank of Mum and Dad for business, letâs look at how exactly it operates.
Buying a house is an exciting milestone, but saving up for the down payment can be challenging, especially for first-time homebuyers. If your son is hoping to purchase a home soon, you may be wondering if you can help him out by gifting money for the down payment. The short answer is yes, you can gift money to your son to put toward a home purchase, but there are some important factors to keep in mind.
Is Gifting Money for a Down Payment Allowed?
Giving money to a family member for a down payment on a house is legal, which is good news. Lenders want to make sure that the buyer has enough money and income to make the monthly mortgage payments. However, most lenders will accept gift money as payment.
Gift funds can generally account for all or part of the down payment on a primary residence. When underwriting the loan the lender will just want to verify that the money is truly a gift and not a loan that needs to be repaid. As long as you provide documentation confirming that the money is a gift, there should be no issues using the funds for the down payment.
Gift Tax Considerations
When giving monetary gifts above a certain amount, you need to be aware of gift tax rules and limitations. The IRS allows individuals to give up to the annual gift tax exclusion amount each year ($16,000 in 2022) without having to report the gifts or pay gift tax.
As the gift giver you would need to file IRS Form 709 if giving more than the annual exclusion amount. However, the gift tax is unlikely to come into play for most people giving money for a home purchase. Why? Because there is a lifetime gift and estate tax exemption that allows you to give up to $12.06 million in 2022 free of federal gift or estate taxes.
If you plan to gift more than the annual exclusion amount, it’s a good idea to consult a tax professional. They can offer guidance on the best way to structure the gift to stay under the lifetime exemption if needed.
Providing the Gift Funds for Closing
There are a couple options for actually transferring the gift funds:
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Wire the money directly to the closing agent. This ensures the money will be available on time for closing day. Ask the closing agent for wiring instructions.
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Give the homebuyer a cashier’s check. Make the check out to the title company and give your son the check to bring to closing.
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Transfer the funds to your son’s account. Your son can show the lender the deposit and account statements that show the money has been in his account for a while.
The lender will need a gift letter signed by you, the donor, no matter how you send the money. The gift letter confirms that you are related, says how much the gift is, and says that the money doesn’t need to be paid back.
Impact on the Home Loan
Using gift funds for a down payment can allow your son to buy sooner, purchase a larger home, and potentially avoid private mortgage insurance (PMI).
Gifted funds are especially helpful for first-time buyers who haven’t had as many years to accumulate savings. The larger down payment also means your son will borrow less and have lower monthly mortgage payments.
Keep in mind that most lenders will want PMI even if your son puts down less than 2020. Adding PMI to your son’s monthly payment protects the lender if he doesn’t pay back the loan. Conventional loans don’t need PMI if the down payment is 20% or more, but
Things to Consider Before Gifting Money
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Your own finances. Be sure you can afford to gift money without impacting your retirement savings or other goals. Don’t gift so much that you have to change your own lifestyle.
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Future gifts/inheritance. Look at the gift as part of your overall estate plan. Will it count toward future inheritances for your son or other beneficiaries?
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Recipient’s finances. Consider your son’s income, debts, and ability to afford the mortgage payments, insurance, taxes, and upkeep. A gift shouldn’t set him up for financial hardship.
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Relationship dynamics. Gifting a large sum of money can alter family dynamics. Set clear expectations about what the money should be used for.
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Documentation. Be sure to document the gift and work with your son’s lender to provide the necessary verification. This includes gift letters and proof of funds transfer.
Alternatives to Gifting the Down Payment
If you want to help your son but are unsure about gifting the down payment, here are a few other options to consider:
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Help pay closing costs instead. Closing costs can total 3-5% of the total loan amount.
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Co-sign the mortgage loan. This pledges you as a guarantor if he cannot make the payments, so consider this carefully.
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Provide a personal loan with set repayment terms. You become the lender, so set up a promissory note.
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Consider down payment assistance programs. These programs provide grants, low interest loans, or deferred loans to help with the down payment.
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Explore joint purchasing if you want to retain ownership. You own a share and your son owns a share.
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Let your son pay you back over time. Set up a family mortgage with set repayment terms.
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Wait and gift money later. If funds are tight now, you may choose to help out after he’s in the home.
Talk to Your Financial and Tax Advisors
Deciding whether to gift money for a down payment involves weighing many personal and financial factors. Before moving forward, it’s wise to:
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Consult a tax pro regarding gift tax questions and the best way to structure a large gift.
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Discuss the impact with your financial advisor and estate planning attorney.
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Review the gift rules with your son’s loan officer.
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Talk to your son to ensure he can truly afford the home long-term.
Gifting money to help a loved one purchase a home can be very gratifying. Just be sure to do so in a way that protects both your finances and your relationship. With careful planning and open communication, your gift can provide a great financial boost at an exciting point in your son’s life.
Can my child get a home loan with a gifted deposit?
Australians can use gifted money for a home loan deposit. This means that a gifted deposit can be a very helpful way to help your child get on the property ladder and into their own home.
With the current state of Australiaâs property market, many young Aussies whose financial situation would otherwise restrict them from buying their first home can do so with the help of the Bank of Mum and Dad.
In Australia, the recommended house deposit is 20% of the propertyâs value. Paying a lower deposit than this will mean that borrowers also have to pay something called lenders mortgage insurance (or LMI), which helps to ensure a lender can recoup their losses if the borrower cannot keep up with their repayments.
Over time, they will pay back the borrowed money along with interest charged at a fixed interest rate or variable rate. By increasing the lump sum used for the initial home deposit, borrowers can decrease the loan amount needed and therefore lower the interest paid back over time and the loan repayments each month.
If an immediate family member or close friend does choose to give someone a large sum of money to be used for a gifted deposit, there are some extra things to take into consideration.
Evidence of genuine savings
Since youâll be making regular repayments on your home loan, your lender will require some evidence referred to as âgenuine savingsâ. This is made up of any money that is saved over time, whether itâs from work income or investments or other means of saving. It does not include money received via gifts, inheritances, winnings, gambling, or other windfalls.
Real savings show a lender that you know how to handle money and give you more confidence in your ability to make regular home loan payments. Most lenders will consider money from a cash gift or inheritance to be a part of âgenuine savingsâ after a set period of time (starting from three months, dependent on the lender).
This also helps to stop people from attempting to buy houses or make home loan repayments on their credit cards, for example.
How Can I Gift Money To Kids Without Being Taxed?
FAQ
Can I give my Child money to buy a home?
There are several ways parents can help their children buy their first home: Can I gift my child money to buy a home? Yes. Most parents give their kids cash as a gift to make up the difference in their deposit and improve their ability to borrow money, which lets them get a better mortgage deal or borrow more.
How can I give my Child a house deposit?
Getting a retirement interest-only mortgage on your home is one way to get the money you need to give your child a down payment on a house. When you take out a retirement interest-only mortgage, you release equity from your home. You then make repayments on the interest on your loan monthly (this means the amount you owe doesn’t increase over time).
Who can gift a deposit for a mortgage?
A gifted deposit usually comes from parents or grandparents. Although, in theory, anyone could gift a deposit for a mortgage, some lenders have more specific criteria. For example, some are more wary if the deposit comes from a friend or more distant family member.
Can a child make a down payment on a mortgage?
If your child plans to use your gift to pay for a down payment on a house, the lender will probably want proof that it was a gift. You or your adult children should check with the mortgage lender about the requirements to document a down payment gift. Mortgage lenders have these rules to protect themselves against fraud or default.
Can a child use gift funds as a down payment?
If your child or family member is purchasing an investment property with a mortgage loan, gift funds are not allowed to be used as part of the down payment. However, if your child is purchasing the property in cash (without a mortgage), they can use gift funds.
Should I give my Child money for a down payment?
You can gift funds for a down payment and avoid a gift tax if you stick within the IRS exclusion amount, which is $19,000 per year for 2025. Giving your child money toward a down payment can help them save money and borrow less when buying a home. This can be especially helpful when they’re dealing with soaring home prices and high interest rates.
Can my parents give me money for a downpayment on a house?
Mortgage gift letter rules by loan type
FHA loans: The Federal Housing Administration (FHA) backs mortgages with a minimum down payment of 3.5 percent. That full amount can be gifted, but the FHA requires a gift letter and supporting documents.
How much can I give my child for a down payment on a house?
While there is no limit to how much money you can accept as a gift for a home down payment, when you’re going through the mortgage loan application process, …Jun 18, 2024
Do I have to pay taxes if my parents give me money for a house?
Gifts from one person to another do NOT give rise to any tax requirements if they amount to less than the annual exclusion. The annual exclusion in 2025 is $19,000. It sounds like your parents are giving you more than that in total. But each parent is giving you only half the total gift amount, so you’re okay.
Can my parents give me 100k for a house?
Yes they can gift you that amount tax free under their life time estate and gift tax exclusion. However be aware that many lenders will want to see the funds have been in your account for several months prior to closing.