

Nationwide, about a third of first-time buyers got help from a relative or friend last year - 27 percent got a gift and 7 percent got a loan, according to a survey by the National Association of Realtors.

But in the Bay Area, "it's definitely more than 50 percent (that get help). A lot of times it's just a little money. Sometimes it's a bigger amount," says Jennifer Rosdail of Paragon Real Estate Group.

Some parents give their kids money for a down payment, others lend it to them. Some buy the home as co-owners with their children. Or the parents might buy the home outright and lease it to the kids with an option to buy or gradually give it to them. Each of these options has its own tax and legal consequences.

Arin Keskin and wife Merve just moved into a house they bought for $665,000 in South San Francisco with help from Arin's mom, a neurologist in Istanbul.

Their lender demanded a large down payment - 36 percent - probably because they came to the United States only a few years ago to get their master's degrees and had just gotten their first jobs and didn't have established credit, Arin says.

His mom, Sabiha Keskin, considered buying the house outright and letting them pay her back over time. She also considered giving them 20 percent for a down payment and owning 20 percent of the house. But having her mother-in-law on the title "made my wife a little nervous," Arin says.

In the end, Arin's mother gave the couple about $230,000 without going on the title.

Here's a closer look at two ways parents can help their kids buy a house. In my Tuesday column, I'll present other options.

Down payment gift

Giving children funds for down payment is the simplest option and least likely to cause a family feud.

Most lenders let borrowers use gift funds for a down payment on a personal residence. They usually require a letter from the parents stating the money is truly a gift and not a loan.

In some cases, lenders want borrowers to contribute some of their own funds, to prove they can save money and have some skin in the game.

And they usually want borrowers to prove they have enough of their own money, at least six months of mortgage payments, in reserves, says Paragon broker Julie Peisner.

Under Freddie Mac's guidelines, borrowers can use a gift for the down payment, but they must put in at least 5 percent from their personal funds if the loan exceeds 80 percent of the purchase price. However, the "personal contribution" does not apply to a Home Possible mortgage, which Freddie developed for borrowers "with cash or credit issues," Freddie spokesman Bill German says.

Union Bank says that on portfolio loans (which it plans to hold), borrowers can use gift funds on loans up to $2 million for primary residences. If the gift is at least 20 percent of the purchase price, the borrowers would not be required to bring in any of their own funds, but will need their own funds "to meet our reserve requirements, which would typically range from two to 12 months of principal, interest, taxes, insurance and association dues if applicable," a Union Bank spokeswoman said.

Gift tax, explained

The biggest issue with gift funds is the widely misunderstood gift tax.

Every year, any person can give any number of other individuals up to $14,000 each with no gift tax consequences. This amount, which goes up periodically, is called the annual gift tax exclusion.

Anything over this amount is subject to gift tax. However, rather than paying the gift tax, it is first deducted from the giver's lifetime gift-and-estate tax exclusion, which is $5.34 million per person (indexed to inflation). This is the total amount a person can give during life and upon death free of gift or estate tax.

The recipient never pays gift or income tax on a gift.

Suppose a father gives his son $14,000 to buy a house this year. Neither father nor son have to report the gift to the IRS or pay tax on it.

If the father gives the son $100,000, however, the father will have to file a gift tax return and reduce his lifetime exclusion by $86,000.

A father and mother could give the son $14,000 each or $28,000 this year without gift tax consequences. A father and mother could give their son and daughter-in-law a total of $56,000 in one year.

The drawback is that the parents lose all control over the money. In California, if parents give their son money for a down payment, half of the money will belong to his wife unless he takes steps to segregate it as his separate property. If they divorce, "He is subject to losing half of it through commingling," says Rich Arzaga, founder of Cornerstone Wealth Management.

Down payment loan

Another option is lending children a down payment. Most lenders allow this as long as the terms are disclosed, the parental loan is subordinate to the first mortgage and the two loans combined meet their loan-to-value requirements.

Payments on the parent loan will be included in calculating the borrower's debt-to-income ratio. "This could reduce the amount of loan" buyers can get, says Matthew Carson, a mortgage broker with First Capital Group.

It could also make the terms on the first loan less favorable.

Parents can set an interest rate that is more than what they are getting in a bank account but less than what a bank would charge for a home equity loan or line of credit.

They must charge at the least the Applicable Federal Rate published by the Internal Revenue Service. For a medium-term loan of more than three but not more than nine years, the current rate is 1.82 percent. (For other rates, see http://1.usa.gov/VUH1cx.)

Parents should record the loan with their county recorder. This secures their interest in the home and lets the kids deduct payments to the parents as mortgage interest. The parents "will have to pick up the interest income" on their tax return, says Dan Jones, a tax partner with Armanino LLP.

Parents are not allowed to tell the bank they are providing money to a child for a down payment as a gift, while expecting the child to repay it. "Lying or misleading a lender into making a mortgage loan is fraud," says Keith Gumbinger, a vice president with HSH Associates. "That's a felony charge."

But if parents can't afford to give their child a down payment, they should think long and hard before lending them the money. "If you can't afford to lose the money, you probably shouldn't do it," Arzaga says.

Consider affordability

Whether they give or lend children money, parents should make sure they are not helping them stretch to buy a home they can't really afford.

"One of our clients helped the child buy into the same neighborhood they lived in. The parents were excited, but it turned out to be a huge burden for the kids," says Brett Gookin, director of wealth management with Aspiriant. There can also be problems with friends "if you're living in a $2 million house and your peer group isn't."
