Lenders are raising down payment requirements, setting the stage for more parent-funded solutions.

Wondering what to tell your folks to give you this holiday season? How about some down payment assistance to help you buy a home? It's not the kind of gift you can unwrap, but it will last a lot longer than a pair of slippers.

Cheaper homes, bigger down payments

Homes are getting cheaper, but that doesn't mean they're more affordable. Consider the cost of a single-family home in Southern California's Anaheim-Santa Ana metro area: a year ago, it cost about $714,200. Today, the metro's median home price is $517,300. This 28 percent decline would be great from an affordability standpoint, if only mortgage lenders hadn't changed their loan underwriting policies.

The problem relates to changes in down payment requirements. A 2008 National Association of Realtors (NAR) study reports that median down payments by first-time home buyers increased to 4 percent of the purchase price, versus 2 percent in the prior year. While 4 percent doesn't seem bad, NAR chief economist Lawrence Yun has pointed out that this number is already outdated. "The study covers transactions through the middle of 2008," he says, "so we can assume the down payment numbers have shifted recently because credit tightened, and no-down payment loans all but disappeared around the close of the survey."

If the no-down payment mortgage has disappeared, that leaves homebuyers scrambling to come up with a 20 percent cash down payment. Continuing with the example above, 20 percent of $517,300 equates to $103,460.

Gift rules apply

Even if you did have $100,000 sitting in the bank, you might be reluctant to tap every last dime of your savings-particularly at a time when unemployment is on the rise. But it's more likely that you don't have anything close to that kind of money sitting around. Not many first-time buyers do.

Here's where your parents can help. Your lender will allow you to use gifted funds from a family member as your down payment. Parents are usually the most suitable donors because they're more likely to have the savings to spare. You'll have to document that it's truly a gift and not a loan. This is generally done with a gift letter that's signed by both you and your parents. Your folks may also have to provide the lender a bank statement to prove that the money is really there. And finally, your parents will have to file a gift tax return if the amount given exceeds the annual gift tax exclusion, which $12,000 in 2008. They won't have to pay gift taxes unless they exceed the lifetime exclusion ($1 million in 2008), but they still have to file the return.

Accepting the generosity of your parents is particularly attractive right now, because it enables you to take advantage of today's low home prices and relatively low interest rates. So this holiday season, ask for the ultimate holiday gift: a new home!

Published on December 7, 2008