Securing Monetary Gifts for a Down Payment on a House

January 20, 2020

Coming up with a down-payment for your home can be a daunting task for a first time homebuyer.  You’ve been planning and saving for months to come up with enough money to make your home buying dream come true. Then you get some great news…a very generous person has just offered to give you a financial gift to help you meet your goal of buying your first home!

If that’s the case for you, make sure you know the rules around how to apply gift money toward your down payment. Lenders will notice large sums of money that have been recently deposited into your bank account so you’ll want to be prepared to disclose that this money is coming from a gift.

Depending on the type of loan you secure (Conventional / FHA / USDA / VA), there are certain conditions for this gift your lender will require in order to confirm your ability to pay back the home loan and protect themselves against loan default.

Let’s start with WHAT YOU NEED TO KNOW regardless of which type of loan you are securing.

  • Gift money must be just that – GIFT MONEY. In other words, it does not have to be paid back at any time. It can’t be a loan disguised as a gift.
  • A GIFT LETTER provided by the giver will be required by the lender. The letter should include who the donor is, their contact information and your relationship, how much the gift is for, where the money is coming from and a statement indicating there is no expectation of repayment. It should also include when the funds were or will be given.  Click here for a sample gift letter. 
  • PROOF OF FUNDS - Most lenders will require additional bank information from the donor showing available funds in their account and/or proof of fund transfer to your account.

WHO CAN GIVE YOU A GIFT? 

Well, that depends on which type of loan you are securing.

  • For CONVENTIONAL LOANS the giver must be a relative. This includes a spouse, child or other dependent.  It can also be anyone who is a blood-relative or related by marriage, adoption or legal guardianship.  Domestic partners and fiancés may also give funds for a down payment.  If Fannie Mae is providing the loan, then future in-laws are eligible to give.
  • For FHA LOANS all of the above apply AND gifts may also be received from close friends, employers, labor unions and charitable organizations. Government agency and public entity assistance may also be received for low-to-moderate income or first-time homebuyers.
  • USDA / VA LOANS do not place many restrictions on who can give a gift.

Under no circumstances can you receive a gift from anyone who is directly or indirectly involved in the actual home buying and selling transaction.  This includes, but is not limited to the seller, builder, developer, real estate agent, real estate broker or any attorneys involved in the transaction – even if they are a relative or family friend!

IS THERE A LIMIT ON HOW MUCH CAN BE GIFTED?

  • For a SINGLE FAMILY HOME – the entire down payment can be gifted with no limit on the amount given. You, the homebuyer, are not required to contribute any of your own money toward the down payment.
  • For a MULTI-FAMILY HOME – the same rule above applies if the down payment is 20% or more of the total purchase price. If the down payment is less than 20%, then you, the homebuyer, are required to contribute at least 5% of your own funds.

WHAT ARE THE TAX IMPLICATIONS FOR GIFT MONEY USED FOR A DOWN PAYMENT?

In general the following rules apply:

  • The GIFT RECIPIENT is not required to report the gift to the IRS or pay gift or income taxes on the value of the gift. Basically, you are not responsible for any taxes on the gift.
  • The DONOR will have to report the gift ONLY if it exceeds $15,000 for a single person or $30,000 for a married couple. This is the annual amount allowed by the IRS. If the gift exceeds this amount, the IRS will apply any excess to the giver’s lifetime gift exemption of up to $11.4 million. 

Tax laws are always changing, so it’s recommended that you and your donor consult a tax professional before any gift money transactions occur!

So, if you happen to have a person in your life who has a vested interest in helping you financially, talk to them about making a gift toward the down payment of your first home!  As long as you follow the rules, this can be a game changer in helping you quickly transition from renting to owning your first home… and the long-term financial benefits of home ownership far outweigh long-term renting!  For more on that, CLICK HERE!

Disclaimer: The information in this article is accurate to the best of our knowledge at the time of publishing. For specifics on gifts for down payments and tax implications of monetary gifts, please consult a mortgage expert and your tax advisor.

About the author 

Jennifer Sims

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