WSJ : When Home Buyers Ask Mom and Dad for Cash

[pom]

http://finance.yahoo.com/news/home-buyers-ask-mom-dad-221600174.html

"In fact, a loan from a parent could raise a borrower's debt-to-income ratio sufficiently to result in disqualification for a mortgage."

     If it really raises their debt-to-income ratio all that much, maybe they should consider a smaller house.

"Buyers seeking jumbo mortgages—loans above $417,000 in most parts of the country and $625,500 in high-cost areas—may especially need the help."

     God damn it, why would they buy a 400k house if you need to borrow from family?

"Assuming the borrower can afford the monthly payment, it's a way for a child to take responsibility but for parents to help out,"

     Totally stupid comment. Obviously the kid does not take responsibility, that is why he needs mommy to come and save the day.

[mpbaker22]

Agreed.  How do they know if the downpayment is gift money?  Is that public record?
I would think if I tried to pay them $20K, they would just see it as $20K and not know how I got it ...

This did happen in my family, but I can't fathom being so insecure in debt that I have to receive gifts to afford a loan.

[lisahi]

Reminds me of that HGTV show "My House, Your Money" where it shows parents and adult children house shopping together, with the parents footing the bill. It's actually a funny show sometimes if you can resist the urge to slap everybody. The only semi-mustachian episode I saw was when the parents were purchasing the house not just for their two out-of-work-actor kids, but as an investment, since they already owned multiple rental properties. The parents looked at each house to determine how many bedrooms they could create and how many walls they could erect so they could get lots of tenants in the house while their kids were living there as well. Their kids weren't thrilled. (hahaha)

[PathtoFIRE]

Agreed.  How do they know if the downpayment is gift money?  Is that public record?
I would think if I tried to pay them $20K, they would just see it as $20K and not know how I got it ...

This did happen in my family, but I can't fathom being so insecure in debt that I have to receive gifts to afford a loan.

In my pre-Mustachian days, we got a small loan from the parents so that our house downpayment wouldn't completely drain our emergency fund, and the bank made them sign a statement to that effect that the cash was a gift, not a loan. They knew because we did our banking with the same bank/mortgage company, and they could clearly see the recent deposit.

[ChiStache]

Oh boy, I think this is a shame.

Just speaking from my own experience: When my husband and I closed on our house, knowing that we had scraped together every damn penny of that 20% down payment, we felt an enormous sense of accomplishment. We ordered thai food that night and ate it in the middle of the bedroom floor. The house was totally empty, but our hearts were so full thinking of the life we would build there together. It was one of the happiest moments of my life. And still, to this day, when we feel overwhelmed by our financial goals and just want to give up, we look at our house and realize that we can accomplish a lot if we work hard and stay focused.

[LalsConstant]

To put another spin on it:

My mother and I once spoke seriously of her lending me a mortgage.   The reason why is she felt that was a safer investment than other alternatives with the same yield and she wants me to own a house.

When I carefully explained why that was a bad idea for reasons having nothing to do with financing she let it go.  Truthfully I do not think it is a great idea and hope she has forgotten about it.

But it is not the worst idea.  If I genuinely felt I would repay her in full I might do it if no other option was available but I would insist on hiring an attorney to draw up a contract.

[plantingourpennies]

We took out a 50K loan from my parents 3 years ago; bought a duplex with it. The terms were 6% with a 5 year balloon

This last month we paid off the loan in full.

It enabled us to make a very nice investment at a time when we could not have gotten a loan anywhere else, at a time when my parents were moving their money from stocks to bonds (they felt we were a very good risk, at an above average interest rate).

Its been a win-win.

Best,
Mr. PoP

[AJ]

Agreed.  How do they know if the downpayment is gift money?  Is that public record?
I would think if I tried to pay them $20K, they would just see it as $20K and not know how I got it ...

This did happen in my family, but I can't fathom being so insecure in debt that I have to receive gifts to afford a loan.

In my pre-Mustachian days, we got a small loan from the parents so that our house downpayment wouldn't completely drain our emergency fund, and the bank made them sign a statement to that effect that the cash was a gift, not a loan. They knew because we did our banking with the same bank/mortgage company, and they could clearly see the recent deposit.

Even if you don't bank with the same place as your mortgage, they will know. They want to see where the money came from, and will require documentation to that effect. You can get around it by depositing the money and then waiting a few months to let the account "age", but even then if the amount you have relative to your income throws red flags they will ask for further documentation. Borrowing down payment money runs counter to the spirit of requiring a down payment in the first place. If they wanted you to borrow it, they would want to be the lender as well.

[jrhampt]

My inlaws offered us help with a downpayment when we bought a house, but it didn't occur to us to take it since we already had a downpayment saved.  In retrospect, I'm not sure if this was smart or not.  They have certainly helped out the other kids and at times it would be nice to be the one getting a new free car, etc., but you never know if these things come with strings attached.

[mpbaker22]

Agreed.  How do they know if the downpayment is gift money?  Is that public record?
I would think if I tried to pay them $20K, they would just see it as $20K and not know how I got it ...

This did happen in my family, but I can't fathom being so insecure in debt that I have to receive gifts to afford a loan.

In my pre-Mustachian days, we got a small loan from the parents so that our house downpayment wouldn't completely drain our emergency fund, and the bank made them sign a statement to that effect that the cash was a gift, not a loan. They knew because we did our banking with the same bank/mortgage company, and they could clearly see the recent deposit.

Even if you don't bank with the same place as your mortgage, they will know. They want to see where the money came from, and will require documentation to that effect. You can get around it by depositing the money and then waiting a few months to let the account "age", but even then if the amount you have relative to your income throws red flags they will ask for further documentation. Borrowing down payment money runs counter to the spirit of requiring a down payment in the first place. If they wanted you to borrow it, they would want to be the lender as well.

I guess my thoughts are these scenarios:
1)  I transfer $50K from a broker to my bank account to pay a down payment.  Would the bank know the difference between buying a penny stock that happened to take off vs. investing monthly for 5 years?
2)  Parent transfers $50K into my 'other' bank account which I transfer to my bank account.  Would the bank realize that the money came from the parents if I funneled i through other accounts.
3)  I just don't spend a lot and it came together over 3 years or w/e the time frame is.

I guess what you're saying is the documentation they would ask for would include those three scenarios, and acting like the 50K was 'mine' in scenario 2 would be the same as lying to the bank.  Is that correct? 

IE in scenario 1, they would ask for stock transactions (or a monthly flow of cash into the account).  In scenario 2 they would ask for account records from the 'other' account.  In scenario 3, they would ask for the records again.

[joerichramblin]

We did it slightly different.
My parents did gift my part of my down payment - however we share the house. They live downstairs (beautiful walk out basement with their own garage, we live upstairs with the same setup. We share all the utilities/house costs except only  I pay the mortgage payments. This allowed my father to retire early (my mother never worked) Although since he's a DIY kind of guy and a born putterer - all our house stuff is done by him, mainly because he can't sit still to save his life.  Since I adore my parents, I haven't found sharing space with them all that difficult and its worked out really well. Plus they've gotten to be able to spend qaulity time with their grandchildren - I'm an only child which I know my mother really really enjoys. (no they don't babysit for free! )

[Albert]

I wouldn't borrow money from family or lend them any, but would be ok with gifting some if the need arises. I kind of have done it already by allowing my sister to live in my old apartment I own for free (she pays utilities and taxes). I'm sure they'd help me out as much as they could as well if something bad happened to me. That's why it's called a family instead of a bank. I wouldn't want that kind of relationship with them...

Edited: maybe I should add that if we were all super wealthy moving money around for business reasons then it would be different and contracts, attorneys etc. would probably be a necessity.

[mensa]

Sad and pathetic: My 45 year old brother has just asked our mother to gift him 35k for a down payment on his second home. She gave him 30k for the first one 8 years ago.

[Self-employed-swami]

Sad and pathetic: My 45 year old brother has just asked our mother to gift him 35k for a down payment on his second home. She gave him 30k for the first one 8 years ago.

What happened to the first house?

[mensa]

He's still got it - just re-fi'd to 80% to fund closing costs on the second one, because he HASN'T GOT A CENT saved. Who buys a second home without any money???? Apparently my brother does.

[ace1224]

i used my "wedding money" as a downpayment on my house.  i told my parents since i don't plan on getting married anytime soon that i would like to have that money for a house. 
i've known forever that there was a separate fund for my wedding, but i don't want to get married and they didn't want to keep it.  to avoid the gift vs. loan thing i had actually done some research and saw that the FHA loan required  3 months of bank statements so i just put the money in my account and sat on it for sometime before i started buying.  then at that point as far as the bank was concerned it was mine.

[Insanity]

My parents have loaned me money twice for home related things:

1) I bought my first townhouse and miscalculated the 20%.  It was a new construction and I didn't fully understand the closing fees and was short a bit.  I had paid them back in the span of 3 months.

2) The kitchen remodel we just did.  We plan on having them paid back by the end of next year.

[AJ]

I guess my thoughts are these scenarios:
1)  I transfer $50K from a broker to my bank account to pay a down payment.  Would the bank know the difference between buying a penny stock that happened to take off vs. investing monthly for 5 years?
2)  Parent transfers $50K into my 'other' bank account which I transfer to my bank account.  Would the bank realize that the money came from the parents if I funneled i through other accounts.
3)  I just don't spend a lot and it came together over 3 years or w/e the time frame is.

I guess what you're saying is the documentation they would ask for would include those three scenarios, and acting like the 50K was 'mine' in scenario 2 would be the same as lying to the bank.  Is that correct? 

IE in scenario 1, they would ask for stock transactions (or a monthly flow of cash into the account).  In scenario 2 they would ask for account records from the 'other' account.  In scenario 3, they would ask for the records again.

Yes, exactly.

In scenario 1, the bank will ask for the last few months of history on the account. That would tell them whether the funds came from a deposit or from a penny stock that took off.

In scenario 2, the bank will see the large deposit from your "other bank" and will ask you for the last few months of statements from that account as well. If they see the large deposit on those statements, they will require proof of where that came from. If you've funneled it through 10 accounts, they will ask for statements for all 10 until they see where it came from.

Scenario 3 is what they are hoping for.

If you can let the $50k "age" for a few months, then it will appear on all the statements and you could pretend it was yours. Lying is such a harsh word...I would call it misrepresenting ;)

[mpbaker22]

Yes, exactly.

In scenario 1, the bank will ask for the last few months of history on the account. That would tell them whether the funds came from a deposit or from a penny stock that took off.

In scenario 2, the bank will see the large deposit from your "other bank" and will ask you for the last few months of statements from that account as well. If they see the large deposit on those statements, they will require proof of where that came from. If you've funneled it through 10 accounts, they will ask for statements for all 10 until they see where it came from.

Scenario 3 is what they are hoping for.

If you can let the $50k "age" for a few months, then it will appear on all the statements and you could pretend it was yours. Lying is such a harsh word...I would call it misrepresenting ;)

I'm not in the situation to need to do that, but since I've never purchased property, that answers a lot of questions.

Thanks!

[willn]

There's no need to try and launder the gift money.  The bank doesn't care, as long as it isn't a loan.

And if your parents certify that it is a gift, but then later claim it is a loan, someone is probably committing mortgage fraud. 

And if it is a loan, then you can't afford the house, and your parents can't afford to loan you money, so don't buy it. 

There are good reasons bank won't loan you the entire amount of a house purchase, so don't try and figure out ways around it.  It's just a really bad idea for something big and risky.

[mpbaker22]

FYI for everyone, I'm asking hypothetical questions.  I'm not receiving cash gifts for a home loan or anything like that, I was just curious as to how that works when the situation occurs.

I am actually about to buy a house, but my liquid assets are a 10% down payment, and I have stock up to 50% of the house value, I just haven't decided exactly what I want to do (pay PMI for a bit or cash in on some stock).

[Insanity]

Agreed.  How do they know if the downpayment is gift money?  Is that public record?
I would think if I tried to pay them $20K, they would just see it as $20K and not know how I got it ...

This did happen in my family, but I can't fathom being so insecure in debt that I have to receive gifts to afford a loan.

In my pre-Mustachian days, we got a small loan from the parents so that our house downpayment wouldn't completely drain our emergency fund, and the bank made them sign a statement to that effect that the cash was a gift, not a loan. They knew because we did our banking with the same bank/mortgage company, and they could clearly see the recent deposit.

Even if you don't bank with the same place as your mortgage, they will know. They want to see where the money came from, and will require documentation to that effect. You can get around it by depositing the money and then waiting a few months to let the account "age", but even then if the amount you have relative to your income throws red flags they will ask for further documentation. Borrowing down payment money runs counter to the spirit of requiring a down payment in the first place. If they wanted you to borrow it, they would want to be the lender as well.

When I bought my house they asked for documentation of all large transactions (around $5000).  I ended up having to make a spreadsheet to show all of the transactions and the source documentation.  This was a requirement even for transactions where you moved money from savings to checking in the same bank.  The loan process was hard and I'm glad I don't have to do that again.

When did they ask you for the documentation?  I'm curious, cause I was never asked for any when I had borrowed the money for the closing costs (that was about $6K).

[stevesteve]

Agreed.  How do they know if the downpayment is gift money?  Is that public record?
I would think if I tried to pay them $20K, they would just see it as $20K and not know how I got it ...

This did happen in my family, but I can't fathom being so insecure in debt that I have to receive gifts to afford a loan.

In my pre-Mustachian days, we got a small loan from the parents so that our house downpayment wouldn't completely drain our emergency fund, and the bank made them sign a statement to that effect that the cash was a gift, not a loan. They knew because we did our banking with the same bank/mortgage company, and they could clearly see the recent deposit.

Even if you don't bank with the same place as your mortgage, they will know. They want to see where the money came from, and will require documentation to that effect. You can get around it by depositing the money and then waiting a few months to let the account "age", but even then if the amount you have relative to your income throws red flags they will ask for further documentation. Borrowing down payment money runs counter to the spirit of requiring a down payment in the first place. If they wanted you to borrow it, they would want to be the lender as well.

When I bought my house they asked for documentation of all large transactions (around $5000).  I ended up having to make a spreadsheet to show all of the transactions and the source documentation.  This was a requirement even for transactions where you moved money from savings to checking in the same bank.  The loan process was hard and I'm glad I don't have to do that again.

When did they ask you for the documentation?  I'm curious, cause I was never asked for any when I had borrowed the money for the closing costs (that was about $6K).

I know you weren't asking me but I had a similar experience so I'll answer too.  The broker asked me for transaction history so I just pasted screenshots of a few month of bank transactions.  It was a bit weird since I sensed the broker was meeting some unclear criteria but really wanted me to get the loan.  In my case most of the money had come from a brokerage account in my name and job savings from the previous year so it never was much of an issue.  They also made it pretty clear that loans to cover the down payment weren't okay and that's what they were checking for.  They also didn't seem to want gifts for the down payment although that might have been because it's quite easy to pretend a loan is a gift when it's from a family member.

[Self-employed-swami]

My downpayment was a 'gift' as well (from my Mom's estate; it was all legally my Dad's, but he wanted to split it with my sister and I).  We had my Dad sign a gift letter, gifting me the money ($200,000).  The money was sitting in the lawyer's trust account (I used our estate lawyer for the house papers for simplicity) but the mortgage company wanted that money sitting in my chequing account for 15 days before closing, since they apparently didn't trust my lawyer.  Because of that requirement, he had to write me a cheque for $200,000, which I had to put in my chequing account for 20 days (just to be on the safe side), which I had to then write back to him.  Huge waste of time, imo.  But my regular bank sure took me a lot more seriously after seeing that kind of money flow through my account!

So, I needed a gift letter, and I think I had to provide the mortgage company with 3 months worth of bank statements, showing my usual cash-flow, in addition to a letter of employment from my boss at the time, stating how long I'd worked there, and my salary.

[dragoncar]

I wish I had borrowed a down payment from my parents back in 2010 when I was just starting to earn the big bucks but hasn't yet saved.  Of course that's with hindsight knowledge of the real estate market.

[Jack]

I wish I had borrowed a down payment from my parents back in 2010 when I was just starting to earn the big bucks but hasn't yet saved.  Of course that's with hindsight knowledge of the real estate market.

That's exactly what I actually did in late 2009: my wife and I (although she was my fiance at the time) bought a house immediately after I graduated college. Because I had no job yet, our income was low enough to qualify for down-payment grants (but the FHA required us to bring $1500 to the table anyway).

Long story short: because my parents were willing to loan us that $1500, we were able to get $20,000 worth of grants and an $8000 tax credit on a $107,000 house. It was awesome. (And, of course, we paid my parents back with the tax credit money.)

You might call what I did irresponsible, since I didn't have a 20% down payment (of my own money, at least!) but I'd totally do it again.

[Self-employed-swami]

I wish I had borrowed a down payment from my parents back in 2010 when I was just starting to earn the big bucks but hasn't yet saved.  Of course that's with hindsight knowledge of the real estate market.

That's exactly what I actually did in late 2009: my wife and I (although she was my fiance at the time) bought a house immediately after I graduated college. Because I had no job yet, our income was low enough to qualify for down-payment grants (but the FHA required us to bring $1500 to the table anyway).

Long story short: because my parents were willing to loan us that $1500, we were able to get $20,000 worth of grants and an $8000 tax credit on a $107,000 house. It was awesome. (And, of course, we paid my parents back with the tax credit money.)

You might call what I did irresponsible, since I didn't have a 20% down payment (of my own money, at least!) but I'd totally do it again.

So, they gave out grants for people to buy houses, when they didn't have enough income?

I can't believe that ended poorly for anyone /sarcasm.

[Jack]

I wish I had borrowed a down payment from my parents back in 2010 when I was just starting to earn the big bucks but hasn't yet saved.  Of course that's with hindsight knowledge of the real estate market.

That's exactly what I actually did in late 2009: my wife and I (although she was my fiance at the time) bought a house immediately after I graduated college. Because I had no job yet, our income was low enough to qualify for down-payment grants (but the FHA required us to bring $1500 to the table anyway).

Long story short: because my parents were willing to loan us that $1500, we were able to get $20,000 worth of grants and an $8000 tax credit on a $107,000 house. It was awesome. (And, of course, we paid my parents back with the tax credit money.)

You might call what I did irresponsible, since I didn't have a 20% down payment (of my own money, at least!) but I'd totally do it again.

So, they gave out grants for people to buy houses, when they didn't have enough income?

I can't believe that ended poorly for anyone /sarcasm.

It worked for me, and that's what counts, right?

Plus, it was for people who did have enough income to buy the house (you still had to qualify for the loan like normal). Not to mention, the maximum income & house prices were something like $60k and $250k, so we're really talking about a program designed to help middle-class people, not "the poor."

The real goal of the program (and the catch for the buyer) is that you have to agree to keep the house as your primary residence for 10 years, or else you have to pay the money back (although I think it's pro-rated). The real purpose is promoting stable neighborhoods, not giving handouts to irresponsible people.

[Self-employed-swami]

I'm glad it worked out for you, but it just seems like a poor idea for most people.

[dragoncar]

I'm glad it worked out for you, but it just seems like a poor idea for most people.

But there's so little risk!  Free 20% equity?  Why not?

[Self-employed-swami]

I'm glad it worked out for you, but it just seems like a poor idea for most people.

But there's so little risk!  Free 20% equity?  Why not?

What about not having cash reserves, in case of a large repair, or a job loss?

[Abe]

My parents gave my wife and me money for the down-payment on our house. It was a substantial amount, but less than we've since saved per year. The bank asked for a letter signed by all of us that said it was a gift for the down-payment.  The rest of our financial information was solid and the house well within our budget. That brought the mortgage costs to a lower level while rates and the prices were low.  Our family's finances are more intertwined than I believe most people in the US would be comfortable with, but that's how we've done it for 500 years, and we see no reason to stop in a new country.  There's a lot of potential savings for families in avoiding mortgage loans every time a new generation buys a house. The best way would be to live in the same house, but as in our case, that's often not feasible for job reasons.

[dragoncar]

I'm glad it worked out for you, but it just seems like a poor idea for most people.

But there's so little risk!  Free 20% equity?  Why not?

What about not having cash reserves, in case of a large repair, or a job loss?

Default and live rent free until eviction

[Jack]

I'm glad it worked out for you, but it just seems like a poor idea for most people.

But there's so little risk!  Free 20% equity?  Why not?

What about not having cash reserves, in case of a large repair, or a job loss?

Default and live rent free until eviction

No, the real answer is that the house is so damn cheap that we can pretty much afford it whether we're working or not. The mortgage (including taxes and insurance) is a little over $700 a month, which even for a minimum-wage worker or person receiving unemployment is still only 50% of their income. With two able-bodied, competent adults it would be hard to suck so bad that we couldn't afford it.

We qualified for the loan based on my wife's salary alone (and she's a graphic artist). Given my earning potential with a STEM background, the plan was ultra-conservative regardless of our cash reserves.

In fact, we actually have both been unemployed for significant amounts of time* in the 3.5 years we've owned this house, but I haven't even needed to take money out of my taxable investment accounts, let alone miss a mortgage payment.

As for needing a large repair, I've got my DIY skills, my credit, and my parents to fall back on (in that order). Oh, and my lack of hedonic adaption, too (i.e., there are some things that a normal complainypants person would "need"to spend money to fix, but that I just deal with).

(* In my case the unemployment is due to being picky about jobs -- I've been trying to work as a transportation engineer even though the job market around here is really bad for that. I recently decided to bite the bullet and go for computer programming jobs, and found one within 2 weeks at 50% more pay than I was making as an engineer, despite not having done any real programming in over 3 years.)

[mrpress]

My parents gifted us money for a down payment as well. It's definitely not good for a child to be dependant on a parent after a certain point in their life but I think both parties can benefit if done strategically. We are starting to build wealth way before most of our peers and we hope to put our kids in the same position some day and my parents would love to see the same for their grandkids.

[Abe]

I agree with both of you. It depends on how financially responsible the children are. If my wife and I didn't have well-paying jobs, we wouldn't want to risk my parents' money. In our case, we knew that the mortgage was affordable with our income, but since we'd been in school for our entire lives, had no money saved. It made financial sense to not lose money by renting or having a higher interest rate, and we expect that to support our parents financially to some extent when they are retired.

[HappierAtHome]

The last time I had financial help from a parent, I had just turned 21 and my Dad told me that he was kicking me out of home... but then offered to pay my rent until I started my job a few months down the track. About six months after that his financial situation imploded and I started supporting him financially in a few small ways. So I'm a little biased/jealous on this subject. I tend towards thinking you need to make it on your own, because you can never rely on someone else's charity. But again, I may just be jealous because I'd love to have a rich and generous family.

One friend of mine has parents who did something VERY cool (in my opinion): they made the kids get jobs at 14 and pay a small amount of board. Unbeknownst to the kids, the parents were saving up what they paid in board, and when they were older and financially responsible enough for the parents to trust them, each of the kids got a large boost to their home deposits. Of course, the parents also talked to them about saving, debt etc along the way so they'd saved quite a bit themselves too.