By Dian Hymer
Ten years ago, you and your spouse took the plunge and bought your first home. You set a five-year game plan for yourself, during which time you planned to renovate the place and resell it for a profit. Your proceeds would provide the down payment for a bigger home that would satisfy your long-term housing needs.
As with many well-laid plans, factors beyond your control intervened. The real estate market, which had been robust when you bought, took a turn for the worst. If you'd stuck to your plan and sold after five years, you would have lost money. In the meantime, your household doubled in size with the arrival of two children, making the need for a larger home a paramount issue.
Your first inclination was to consider expanding your current home and avoid a move altogether. However, a quick survey of home values in your immediate neighborhood indicated that this would be foolish. You would run the risk of over-improving your home for the area.
You were convinced, however, that you wanted to remain in the same general vicinity: the commute was convenient, the schools were great and the sense of community felt like home. So you started looking around for a larger home in the neighborhood.
The good news was that the local real estate market had improved dramatically over the past five years. You were confident that you would have no trouble selling your current home for enough money to make a trade-up move possible.
Unfortunately, you also discovered that the real estate turnaround had affected the market in general. Virtually every well-priced home in the neighborhood was selling quickly, often with multiple offers and for more than the asking price. This meant that an offer made contingent upon the sale of your current home didn't hold a chance of being accepted.
As an energetic couple intent on making a move, you called your parents, who gladly offered to "gift" you some money for a down payment. The gift money gave you the resources needed to buy a larger house without having to first sell your starter home.
Most lenders will allow parents to give money to children for part or for all of the down payment. However, the lender will insist that the parents provide a "gift letter" which states that the money is a gift and that it doesn't have to be repaid.
First Time Tip: If you intend to have gift money make up a part of your down payment or closing funds, make sure you get pre-approved with a lender before you make an offer to buy a home. This is particularly important if you are in competition with other buyers. Sellers feel more confident accepting an offer that requires help from the folks if the parents have already agreed to the arrangement in writing and the lender has approved the buyer's financial package.
Preapproval involves actually applying for the mortgage you'll need to complete the sale. All supporting financial documentation, including credit reports, verifications of income and employment and the source of funds to close, will need to be verified by the lender.
The Closing: One irksome aspect of this process for many buyers is that lenders require parents who are making the gift to verify where the money is coming from. If the money is coming from a discount broker account, the lender will want proof that the gift money was actually withdrawn from this account in order to approve the loan.
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