Now that home prices have cooled in key markets across the country, many young people who thought they were priced out of the market are now eager to buy. But they may need a little help from the bank of mom and dad.

Parents can give children money towards the down payment on their first home. But to make sure you do not run afoul of federal gift tax rules, parents should know that each parent can give a child up to $12,000 per year without incurring a gift tax.[1]

The lender is usually okay with the money being put down by the parents, so long as they don't feel the money is actually a loan "in disguise." In order to prove this, each lender will have specific requirements for documentation.

One easy form of documentation is simply a written letter, stating that the money is indeed a gift, and not a loan that needs to be re-paid.[2] This, in essence, frees the child from obligation to pay it back, so it will not impinge on their ability to pay the lender back.

The lender may also require proof of the transfer of funds. This may include a bank deposit slip, or if you deposit the funds on your child's behalf, lenders may want to see documentation of the child's bank statements since the transaction.[3]

Be aware though, that in this tough credit market, lenders may not be satisfied with parents being the sole contributors to a down payment. Children may still need to ante up some of the money themselves, as a form of good faith, in hopes of assuring lenders that the children will not simply walk away from the mortgage and default in the future.

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Reprinted with permission. All Contents © 2008 The Kiplinger Washington Editors

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[1] A gift of up to $12,000 per year without incurring gift and estate tax.  There are certain conditions that may allow for gift amounts exceeding this amount. Consult with a financial professional or a CPA for additional information.

[2] Many lenders have pre-written letters for borrowers and donors to sign, check with them before writing your own.

[3] A printout from the bank, on bank letterhead and signed by a bank employee with an attached business card, can suffice if time does not allow waiting for an actual statement to arrive in the mail.  Some lenders will also allow for a computer generated statement from the borrower’s account, check with your lender for specific requirements though.