How Can We Tap the Bank of Mom and Dad to Buy a Home?
Family dynamics may impact your ability to borrow from your parents
Question: How can we tap mom and dad's bank to buy a home?
A reader asks: "My husband and I want to buy our first home, but real estate prices are higher than we thought. We need almost $20,000 and don't have it. My husband's parents might give us the money for a down payment, providing we can get up the nerve to ask them. Should we offer to pay it back? Is there a secret way to convince your parents to give you money? How can we tap mom and dad's bank to buy our first home and still keep peace in the family?"
Answer: Family dynamics can make it tough when asking parents for money, because every family is different. It would be easy to say that all parents with the means would like to help their children buy a home, but that's not always the case. It takes a bit effort to convince your parents to give you money.
When I bought my first home, I had the down payment and closing costs in hand. What I did not count on was a loan condition that required me to pay off my car loan before I could get a mortgage. I called my mom for assistance. She said, "Why should I help you? Nobody ever helped me." It wasn't the response I expected.
She had the money in the bank and it was a small amount. I promised to pay her back within a few months. She hesitated. I glanced at the boxes piled up in my living room and counted the few days remaining on the calender before I was supposed to vacate my rental and blurted out, "Because if you don't give it to me, I will be on your doorstep with my suitcases and a cat under each arm."
She hung up the phone and wired the money into my account.
Reasons Parents Give Children Down Payment Money
- Some parents really want their children to own a home.If your parents own their own home, the odds are they want to see you in home ownership as well.
- Parents feel empowered when children ask for money.It gives them personal satisfaction to know they can still make a difference in their adult children's lives.
- Your parents might want to ensure that they will have grandchildren.Lots of parents feel it is easier to raise children in a home over an apartment; after all, home ownership is the American dream. They also want their grandchildren to live in a family neighborhood.
- Parents want to lead children to their next level of success and not wait for a will to be divided.Your parents may know how hard it was for them to buy their first home, and they want to make it easier on you.
- Parents love you.Don't ever forget that ace in the hole. Your parents want you to be happy, successful and enjoy all the goodness that life has to offer you. If they can be part of that success, they are successful, too. More than one buyer convinced her parents to give her money by playing the affection card.
- Tax benefits. Tax laws allow parents to give cash gifts to their children up to certain amounts without paying gift tax. For more information, consult a tax accountant.
Asking Your Parents for Money to Buy a Home
Decide whether you want to pay back the money or accept it as a gift. To help convince your parents to give you money, here are a few more tips:
- Ask your parents for money in person.Don't do it over the phone.
- Be prequalified by a lender.Be ready to show your parents that you are not all talk but you are action. You have taken the steps to get a loan preapproval letter from a lender. If the lender has faith in your ability, your parents might have faith as well.
- Show your parents you have hired an agent.With a buyer's agent on your side, your parents will see you are serious and prepared. Give your parents the agent's card.
- Ask your parents to look at homes with you.Your parents can help you to make the right decision. They might even have great suggestions for you based on their own experiences.
- Explain your financial needs.As a couple, you might earn a high income, but pressing demands might make it difficult to save. If interest rates are favorable and prices attractive, now might be the time to buy.
If you choose to pay back the gift, you can always arrange to do so out of the proceeds should you sell the home down the road.
At the time of writing, Elizabeth Weintraub, Cal BRE #00697006, is a broker-associate at Lyon Real Estate in Sacramento.