Federal 'gift tax' rarely levied on down-payment help from parents
Relatively few parents have to pay gift taxes on the cash they give to help their offspring purchase a house.
Q. I am planning to buy my first home this summer, and my parents have promised to give me some money to help with the down payment. Will this create a big IRS bill for "gift taxes?"
A. Probably not. Your mom can give you up to $14,000 for the down payment and your dad can give you another $14,000, regardless of whether they file their taxes jointly or separately, without triggering the federal government's nasty gift tax. If you're married, they could give your spouse another $14,000 each and still no taxes would be owed.
Most down-payment gifts from parents fall far below the government's threshold. But if your folks give you even more, they'll have to file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, to pay the tax by next April 15.
When you eventually apply for a mortgage for a home you want to buy, the lender likely will ask you and your folks to sign a formal "gift letter" stating that the money is truly a gift rather than a loan that must be repaid. The lender might even ask that your parents provide documentation, such as bank or stock-brokerage statements, to show where the money came from.
They won't be able to deduct the gift because you're not a bona fide charity.
Though you don't plan on buying a home until summer, it would be wise to ask your parents if they could manage to give you the down-payment money now so you can immediately deposit it in your own checking or savings account. That's because the lender you eventually choose will probably check the account's average daily balance: Depositing the cash now will raise the average and help improve your chances of gaining loan approval.
You and your parents can get more information about gift taxes by calling the IRS at (800) 829-3876 or by visiting its website, www.irs.gov.
Q. Is it true that closing one or two existing credit cards I never use would actually hurt my credit score? I am planning to refinance my mortgage soon and don't want to do anything that might jeopardize my loan application.
A. Yes, closing one or two credit-card accounts can indeed lower your score, at least temporarily. That's because the lender you choose to refinance will look at your "credit utilization" rate - industry jargon for how much of your total available credit is currently in use.
Ideally, the outstanding balances on all of your cards will be no more than 30 percent of the total credit you have available. But if you close a couple of accounts that don't have a balance while continuing to use the remaining cards, you would be effectively lowering your own credit limit, thus raising your utilization rate and lowering your score.
Should the new rate top that magic 30-percent level, the mortgage lender may reject your loan application or sharply reduce the amount of money you can borrow. Play it safe by waiting to close the unused accounts until after the refinancing is completed.
Q. Can I get a mortgage backed by the Veterans Affairs even though I still have a year left to go in my stint with the U.S. Army?
A. Yes. Most military personnel on active duty can get a no-down-payment mortgage backed by the VA as long as they have had at least 90 consecutive days of service. The key document you'll need is a "VA Home Loan Certificate of Eligibility," commonly referred to as a COE, which confirms you have the right to participate in the home-loan program.
Your commanding officer or personnel officer probably can provide you with the simple application to obtain a COE. Most VA-approved lenders have them, too, and will help you complete it.
You also can download the form from www.ebenefits.va.gov, but you'll have to register on the website first. More information can be obtained from the VA's home page (www.va.gov) or by calling the agency at (800) 827-1000.
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Real estate trivia: The National Association of Realtors says builders need to add 1.5 million new housing units each year just to keep pace with America's rising population. That's nearly twice the average of 766,000 new homes that have been built over each of the past seven years.
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