Updated in January 2025
I often see a down payment gift on a home turning into a never-ending series of gifts. This can become a financial and personal strain on both parties in the relationship. I recommend a strategy that would help avoid getting into such a situation.
The Need For Due Diligence By Both Parties
Both parties must ensure they are financially prepared to give or receive the gift. To help determine this, you need to answer the following three questions:
1. Can You Afford To Give A Down Payment Gift?
Here are some questions to help determine whether you can afford to give the gift. Is your mortgage paid off? Do you have zero credit card debt? Are you maxing out your retirement contributions, including the catch-up provisions? Have you discussed giving the gift with other family members? Are you prepared to gift the same amount to other family members, too? Is the gift a small percentage of your net worth? Are you mortgaging your future for the benefit of another’s future?
2. Is The Receiver Of The Gift Ready To Own A Home?
Homeownership requires both personal responsibility and financial responsibility. Before gifting money for a home down payment, ensure the recipient can afford the mortgage and home repairs. A few questions will help you determine their financial discipline. Do they have any credit card debt? Are they putting at least 6% of their pay in a retirement plan? Are they also putting money towards the down payment? Do they have significant student debt or other debt? If you don’t like the answers you get, then they will most likely run into financial trouble as homeowners.
3. Whose Dream Is It To Be A Homeowner?
I often find that the goal of homeownership is more of the parents’ dream than the child’s. The parents likely benefited from homeownership through increases in sale price and tax benefits. Additionally, parents may also see paying rent as a waste of money. So, make sure the dream of homeownership is the child’s dream, not the parent’s.
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Be Aware Of The Annual Gift Tax Exclusions
The giver of the gift pays the gift taxes, not the receiver. The 2025 annual gift exclusion is $19,000 per person per calendar year. Two parents can gift $19,000 to each child, for a total of $38,000, with no gift tax consequences. For married children, parents can gift $38,000 to their spouse, for a total of $76,000, in a calendar year. You can double these amounts with proper timing. Suppose a child needs $60,000 for a down payment in February. The parents could gift the child $30,000 in December and $30,000 in January next year to meet this amount. Make sure the gift deposits are visible on the bank statements to show the trail of the gifts to the lender.
For more information on gift taxes, see this article from the IRS
Gift Letter Required By The Mortgage Lender
Mortgage lenders want to ensure the borrower’s ability to pay back the loan. Thus, they will ask to see bank statements to show the source of the down payment. Large one-time deposits can set off red flags. The lender will need the borrower to provide a gift letter if the down payment is from a gift. The letter assures them the gift is not a loan and the gift-giver has no financial interest in the property.
For more information on gift letters, see this unsponsored article from Rocket Mortgage
Consider Using A Matching Savings Plan
The best way to help a child buy a home is to match their savings. Let’s assume the child needs $60,000 for a down payment to buy a $300,000 house. Tell them that once they have saved $30,000, you will match it to reach the $60,000 down payment. If they have saved very little money after a year or two, they may lack the financial discipline to own a home. Gifting them money in this situation could put both parties in financial peril.
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