Thinking About Lending a Down Payment? Watch This First

Lending kids money to help with their down payment is a bit trickier than many realize.

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  I am hearing this a lot now. “Our child and partner are about to buy their first house. We’re gonna help out with the down payment as we feel we’re in a strong financial position now. However, we’ve heard that it’s a bit risky. If they split up, the matrimonial-home rules kick in. We could lose half the gifted money to our child’s ex.

Would we be better to technically ‘lend’ the money instead of giving it, even if we’re not going to ask for it back?” Well, this is a bit trickier than many recognize. You see in the eyes of the court — if, sadly, it comes to that — it’s not a loan just because you say it is. It needs to be well documented, at the time — and witnessed properly.

Professional help should be involved, must be involved. But here’s another issue. The lending institution is going to want to know about any and all — I repeat, any and all debts the potential borrowers have. Those debts and their associated payments are a big part of the lender’s underwriting. Even if the parent’s loan interest rate is zero, and even if the repayment schedule doesn’t start for years, that loan could potentially affect the chances of the borrower qualifying for the mortgage.

It may not, but it could. Talk to your lender or mortgage broker about this. Know their thinking. It’s interesting that I’ve seen some industry people suggest getting around this by providing the lender with a Gift Letter which, guess what, says the money is a gift. But then have a private agreement with your child outlining the expectation of repayment. A loan.

“That’ll cover you in court,” they say. I don’t love that advice. It’s, obviously, not very upfront. But also I think there’s a good chance it won’t stand up in court because of the Gift Letter. Especially if no repayments are actually being made. And that’s normally the case. You can watch our previous video, “3 Key Observations About Parents Helping With Down Payments,” for more of my thinking on all of this.

But if you think it’s truly in your best interest to put in protection against the separation/matrimonial-home risk, I think the wisest approach is a good, honest, open dialogue with your child and their spouse. “We love you both. We believe you’re a great couple. But life happens. We’re going to help you out with your down payment but we’re looking for some legal protection. A post-nup. A legal document that clearly defines this gift money as an excluded asset.”

That type of thing. Now don’t listen to me on the legal nuances — I’m a barber, not a lawyer. Again, get professional help. My advice here: Be open. Be honest. By the way, you may want to bring this up AFTER you get your birthday gift from your son or daughter-in-law.