The Do’s and Don’ts of Gift Funds
The Do’s and Don’ts of Using a Gift for a Down Payment
Even if you can afford the monthly mortgage payments, the initial cost of purchasing a home may be too much for you to pay on your own.
According to the National Association of Realtors, recently, between 50% and 60% of home buyers came up with their down payment primarily from their own funds. But this is not always attainable, especially for first-time homebuyers who don’t have the benefit of funds from the sale of their current residence. That’s where a down payment gift comes in —family members or close relatives who want to chip in and help the homebuyer purchase a home, they can do so.
The great news is that you can use gifted funds to make a down payment, but your lender will want to know some details before they allow you to use it. Only two specific groups can give a home buyer money to fund their down payment.
- A friend or family member — as long as they can prove they have a standing relationship with the buyer.
- Government agency — as part of a program meant to get first-time buyers into the market.
- You must confirm the relationship between you and the gift giver.
If you plan on getting gift funds from a friend or family member, you’ll need a gift letter confirming your relationship to the giver. The letter also must indicate that the money is a gift and that there is no expectation of repayment. Usually, the letter is signed by both interested parties.
The lender may also require evidence of the gift. For example, they may ask to see the gift giver’s bank statements to show there are sufficient funds in the donor’s account to make the gift. They may also ask for a bank slip from the buyer’s account to show the down payment funds have been transferred.
Often, gifts change hands during the application process — this allows time for the money to show up on both the giver and the buyer’s bank statements and for the mortgage lender to verify that the cash is from a legitimate source and the pair has an appropriate relationship.
If the gift funds are added to the buyer’s bank account after settlement or closing, then documentation will still be required before it can be applied to the purchase. Typically, this will require a receipt of the cashier’s check as given to the closing agent.
Often buyers ask if you can pay back a mortgage gift?
The answer is no. This is considered mortgage or loan fraud, which is a crime. It can also put your loan qualification at risk as all loans need to be factored into your debt-to-income ratio.
Buyers need to be clear with their lender and confirm that the money received was gifted. A sudden infusion of cash without a traceable source will leave lenders suspicious and, perhaps, wary of completing the loan deal on their end.
Plus, you should talk with your lender to make sure are reporting the gift properly to the IRS.
You may be wondering, how much can be gifted for a down payment?
As of 2018, parents can contribute a collective $30,000 per child to help with a down payment — anything after that would incur the gift tax. Other family members have a $15,000 lending limit before they, too, have to pay taxes.
In many cases, there’s no limit on the amount of gift money that can go into a down payment, as long as the buyer is purchasing a primary residence. However, if someone uses a down payment gift to buy a second home or investment property, they have to pay at least 5% of the down payment. The rest can be a gift.
Next let’s talk about seasoning. If possible, it’s a good idea to ensure gift money is seasoned when it comes time to use it as a down payment. Your lender will want proof that funds have been in the buyer’s account for a substantial amount of time to show that the buyer hasn’t just gathered a bunch of cash on a short-term basis.
The alternative is to have the donor send the gift funds directly to escrow at or near the closing date. That will minimize the documentation requirement from the donor in most cases.
As we talked about earlier, family members have to pay a gift tax for anything over their limit of $15,000, or a collective $30,000 from parents who file taxes jointly. The person receiving the money doesn’t have to pay taxes.
Ultimately, the cost of the down payment is only one expense to consider in the home-buying process. Homebuyers need to pay for closing costs, which include expenses like an appraisal, credit report, and underwriting fees.
Remember the Do’s and Don’ts of a Down Payment Gift
● Do get a signed statement from the gift giver.
● Don’t tell the lender the funds are a gift when it’s a loan.
● Do remind gift giver to keep a paper trail.
● Don’t change or add money without explanation.
● Do get the money in advance and know how seasoned money works.
● Don’t assume all loan types allow down payment gift.
● Down payment gifts can make it easier for homebuyers to afford a home.
When you speak with your lender about which loan program is best for you, be sure to let them know up front that you plan on using gift funds for the down payment. Some loan programs have strict guidelines about how much gift money you can use for a down payment and who can gift you the money.
If you’re in the market for a new home and want a little help, don’t hesitate — just make reach out to a reputable San Pedro mortgage broker like Harbor View Funding to ensure you accept such a gift in the proper manner for your San Pedro home loans.
A gift can put homeownership in reach for plenty of aspiring homeowners. Just make sure your Tustin mortgage lender is there by your side.