Need a hand to buy a home? A gift toward the down payment can help

Most of the millennials flocking to the Washington area start their lives here as renters, but many of them chafe at sending thousands of dollars every month to their landlords. They’d rather buy a home — if only they could come up with the cash for a down payment.

The good news for some of these young renters is that their parents — and sometimes their grandparents — feel the same way.

“As the baby boomers get older and live longer than their parents’ generation, many of them realize that they don’t want to make their kids wait until they die to get an inheritance,” says Donna Evers, broker-owner of Evers & Co. Real Estate in Washington.

“They see their kids renting an expensive apartment, and they want to help them get into a house now so they can build equity and get a start on their future, especially when interest rates are so low,” Evers adds. “It makes the parents feel really good to help their kids or grandkids now when they need it.”

According to the National Association of Realtors, 27 percent of first-time buyers in 2013 received gift funds from a relative or friend to help make a down payment, up from 22 percent in 1999.

The combination of low interest rates and the area’s high rents make buying more appealing than renting to many young people. But the median sale price in the city was $530,000 in July, according to RealEstate Business Intelligence, a subsidiary of Rockville-based multiple listing service MRIS. That price would require a down payment of $18,550 to meet the 3.5 percent minimum for a Federal Housing Administration loan. Closing costs range from 2 to 3 percent of the sales price, adding $10,600 to $15,900 more.

“A lot of young people here have good jobs and can qualify for a home loan pretty easily. It’s just the big need is cash,” Evers said. “It’s especially hard to save if you’re paying $2,500 or more in rent every month.”

Susan Loizou, a real estate agent with Jobin Realty in Centreville, Va., gave her 32-year-old son $14,000 to supplement his savings so that he could make a 10 percent down payment and make the mortgage payments more affordable.

“This generation of young people has a post-recession mentality, with less consumer confidence, and they’re very concerned about not overextending themselves on their housing payments,” Loizou says. “My husband and I decided the gift should be an advance on his inheritance. This is so much better than making your kids wait until you die, because you’re giving them a jump-start on their own financial life.”

Craig McCullough, a realty agent with Evers & Co. Real Estate in Washington, says his grandmother gave him $10,000 toward the purchase of his first home in 2012, money she had saved to help her grandchildren make a start in life.

“I always wanted to help my grandkids and buying a home is just so worthwhile,” says Mildred McCullough, McCullough’s 96-year-old grandmother. “Paying rent is just like riding a merry-go-round, and you never get anywhere. When you buy a house, you have something that belongs to you.”

While Mildred McCullough says she’s proud to have helped her two grandsons, she advises other parents and grandparents to make sure their offspring use the money wisely.

“Make sure they’re using your money to buy a house and not for something else,” she says.

Craig McCullough used his money to buy a two-bedroom, two-bath condo in Northeast Washington’s Eckington neighborhood, and he’s about to sell it after two years for a 200 percent return on his investment.

“I used my grandmother’s money for closing costs and got a zero percent down payment loan, so now I plan to sell this place and buy a new home in D.C. and a vacation home at the beach,” he says. “I never would have been able to buy this place without my grandmother’s help. She wanted to see me use her money to get started in life before she passed away.”

McCullough says some families give their adult children $50,000 or more, depending on their financial ability.

“If parents can leverage a little of their money now it will help their kids be more financially successful in the future,” he says. “The more successful the kids are, the more successful retirement can be for the parents since they won’t need to worry about supporting their kids.”

Gift funds and loans can be helpful, but buyers need to be aware that they may still need to put up some of their own cash, depending on the mortgage they choose, says Scott Davis, a senior loan officer with McLean Mortgage in Fairfax.

“FHA loans allow all of the down payment and even the closing costs to be paid with gift funds, up to a maximum of 6 percent of the loan amount,” Davis says. “Those who qualify for VA loans [backed by the Veterans Affairs Department] don’t have to make a down payment at all, but they can also use gift money for closing costs up to 4 percent of the loan amount.”

For borrowers with conventional loans, the rules are slightly more complicated, he says. Generally, borrowers must put up at least 5 percent of the sale price toward a down payment, and the rest can be gift money. But if you make a down payment of 20 percent or more, the full amount can come from a gift.

“Most of the buyers that I talk to that receive gift money are humble and grateful,” Davis says. “They’ve saved as much as they can, but it’s not quite enough, and they realize they’re lucky to have someone to help them with the rest.”

Davis says that although a few of his clients have received larger gifts for a down payment, most get $5,000 to $10,000 from their families.

In addition to the money, families may have to provide a gift letter to the lender that states that they don’t expect repayment. However, if the money is given to prospective buyers more than 90 days before they apply for a loan, the money is considered “seasoned” and no gift letter is required.

Helping adult children become homeowners is a great idea, and nine times out of 10, it works well, says Larry Rosenthal, a certified financial planner and president of Rosenthal Wealth Management Group in Manassas.

“You just need to make sure the kids can truly afford the house and that you’ve thought through your own retirement and aren’t hurting yourself,” Rosenthal says. “Homeownership is a great thing, but you need to make sure you’re not setting up a situation where your kids are stuck to the umbilical cord.”

If you have your retirement finances in order, Rosenthal recommends using the “laziest dollars” first: your unused home equity or money in the bank that isn’t earning a lot of interest. In the best-case scenario, a relative such as McCullough’s grandmother has set aside money expressly to help adult children buy a home.

“You can take out a home equity line of credit at a low interest rate to help your kids, then pay it back over time,” Rosenthal says. “But you need to throw this idea into your financial plan first and decide whether or not it’s a problem for your own financial security as well as theirs.”

Rosenthal says that sometimes it’s best to give a certain amount for a down payment and then provide a little more in the form of a deferred note to be paid back in five years or as shared equity to be redeemed when the home is sold. The extra money for a larger down payment helps the buyers by lowering their monthly payment.

“I’m definitely pro homeownership, but you just need to be careful because sometimes people throw money at their kids and then they just keep coming back for more,” Rosenthal says.

Loizou gave her son money from a home equity line of credit on her home rather than from savings or investments. “We didn’t want to draw down our savings, and with the interest rate so low, it made more sense to use our equity and pay it back,” she says.

According to the Internal Revenue Service, each member of a family can give a maximum of $14,000 without incurring any tax consequences for the giver or the receiver. A couple can receive as much as $56,000 from one set of parents if both mother and father give $14,000 to each partner.

You need to be open with your other children if you’re helping one, Loizou says.

“We had our daughter, who’s a lawyer, actually write up a document that our son signed at the settlement on his house that this money would come out of his inheritance,” she says. “My daughter understands completely why we wanted to do this and doesn’t have any hard feelings, but we just want to make sure there’s no resentment later on.”

Evers agrees with that approach. “If you’re only helping one of your children to buy a home, it’s important to formalize the arrangement so that everyone in the family thinks you’re being fair,” she says.

Mildred McCullough kept things equitable by giving each of her two grandsons $10,000 at the same time to buy a home.

Evers suggests that parents and grandparents discuss matters with financial planners and tax professionals to make sure that gifts to offspring are affordable and handled in a way that provides optimum value.

Michele Lerner is a freelance writer.