What to Know About House Down Payment Gift Money
Are you wondering about the rules surrounding down payment gifts when purchasing a house? Finding the money to make a down payment on a house can be difficult, so help from a relative can speed up your progress towards buying a home.
For many potential home buyers, their income supports becoming a homeowner reasonably well, but the down payment funds can sometimes be a sticking point. For most renters scraping enough of a down payment together is the most significant obstacle to buying a home.
While relatives might offer to gift you money to help you on your way towards saving a down payment, it may not be as simple as you expect.
Down payment gift funds do fall under some rules and aren’t without any problems. Some folks incorrectly assume you can use down payment gifts from relatives in whatever fashion you choose. Unfortunately, that is not the case.
Let’s take a look at the issues involved when receiving down payment monies to give you the resources you need to make sound decisions. The rules are not terribly complicated when it comes to giving and receiving down payment gifts, but they are certainly worth knowing.
Working as a real estate agent for the past thirty-three years, I can tell you it makes a lot of sense to square away your down payment gift early.
Who Can Give a Down Payment Gift?
When most people think about who can give a down payment gift, they automatically think of a family member. Eligible gift sources for a mortgage down payment, however, can come from other entities as well. Here are some other sources of potential down payment gift funds.
- You Employer or labor union representative
- An organization that helps low-income first-time homebuyers
- A charitable organization
- A Close friend that has a documented and clearly defined interest in the borrower
- Government funding agency
It is worth pointing out that down payment gift funds cannot come from someone with an interest in the sale of the property, such as the seller, real estate agent, builder, or some other associated entity.
Mortgage Underwriters Verify Gift Funds
When you apply for a loan, your lender will look at your financial situation to work out their risk. This is known as underwriting and involves checking your credit score, your earnings, and any assets you have. The underwriters for your lender will look at the money in your bank accounts to ensure you have enough to pay the down payment. If there are large irregular deposits, they will want to know where they came from.
There will typically only be issues with more considerable down payment gift funds. If you have been given money, which is more than half of your monthly income, or a gift which is more than one percent of the value of the home, there could be further checks required.
If you have down payment gift money, your mortgage underwriter may need more information about where these funds came from. They need to be sure that this isn’t a loan that you are expected to repay. To make sure that this new money isn’t a loan, they will need a letter from the gift provider. One of the better first-time buyer tips will be to get your financial house in order before this point.
If you are fortunate enough to have a family member who can give you money towards your down payment, they may need to write a letter. This may be required by the underwriter to explain where the down payment gift money originated from.
The letter should include details about the lender, such as; name, address, contact phone number, relationship to the borrower, and address of the home to be purchased.
Also required in the letter should be the date and amount of funds given to the borrower. They should write a sentence explaining that it is a gift and that there isn’t the expectation of repayment, this should be signed by the gift-giver as well as the borrower.
This might be enough to satisfy the underwriter, or they might need additional documentation. Deposit slips or other statements might be asked for, to confirm the information given in the gifting letter.
Your lender might have a template letter for this purpose. If this is the case, you will need to provide it to the person who has gifted you the cash. If the lender doesn’t have a template, ask them to let you know what their requirements are, so that you don’t waste the time of the person who has been generous with their money.
What Should Be Included in a Down Payment Gift Letter
Here is a summary of what a down payment gift letter should include:
- The address for the property the borrower is purchasing
- The name, address, and phone number of the person giving the gift
- How much is being gifted to the buyer
- The relationship of the person giving the gift to the borrower
- The date that the gift was transferred
- A statement saying that the down payment gift will not be required to be paid back
- The donor’s signature
It is essential to know that the gift letter itself may not be all of the proof a lender needs that these funds are, in fact, a legitimate gift. The lender may also ask for copies of withdrawal and deposit slips as part of their verification process.
Who Can Gift Down Payment Money Based on Mortgage Type?
There are some rules about who is allowed to give you down payment gift money. This changes slightly depending on the type of loan you are applying for. Here is a summary of all the major mortgage programs and their requirements on who can provide gift monies.
There are many excellent first-time home buyer mortgage programs worth exploring. If you are certain a down payment gift will be part of your requirement, make sure you check with the lender before submitting your loan application.
A common first-time buyer mistake is not preparing yourself financially. Don’t be that person.
If you are getting a loan through Fannie or Freddie, gifts can only be from your family members. This will include your close family members, along with cousins, aunts, and uncles, nieces, and nephews.
Also included are stepfamily members, your in-laws, and foster or adopted relatives. Your partner or fiance is also covered for the purposes of these rules.
An FHA loan has a similar rule but doesn’t allow gifts from nieces, nephews, or cousins. They do allow gifts from friends who have an interest in your life, however, and they also permit contributions from your employer, a labor union, government agencies, and charities.
USDA and VA
When it comes to the VA mortgages and USDA loans, they have fewer restrictions. Though they don’t allow gifting from anyone who would benefit from the proceeds of the purchase. What this means is that you can’t use a gift from a developer, builder, seller, or even the real estate agent.
Are There Limits on Down Payment Gifts?
Generally, there aren’t limits on the amount of money someone can gift to you for down payments of closing costs, though there can be tax implications. Some types of loans may need you to contribute a certain amount of the down payment, however. The regulations regarding this can change frequently, so check with your lender for the latest details.
For example, FHA mortgages have a 3.5 percent down payment requirement with credit scores greater or equal to 580. When credit scores are below 580, FHA requires ten percent down. In both circumstances, the whole down payment can be provided by an eligible donor.
Make Your Gift Money Seasoned
If at all possible, it is wise to try and make your gift money what lenders refer to as “seasoned.” The term seasoned means it has been sitting in your bank account for some time. Most lenders recognize two months as being a seasoned amount of time. When money is seasoned, you often don’t have to worry about writing gift letter documentation.
So if you know your parents are going to help you to buy a home by providing a down payment gift, it would make sense for them to give you the money months in advance of your purchase if possible.
Gift funds can’t be used if you are buying an investment property. There are some restrictions on a second home, with gifts not being allowed with loans from the USDA, the VA, or the FHA. Whereas, a traditional loan does allow gifting when purchasing a second home.
When you are buying a primary residence, there are fewer restrictions on gifts. You can use donations to cover all of your down payment for a single-family home.
If you are purchasing a multi-family home and the down payment is 20 percent or more, you don’t need to contribute. If it is less than 20 percent, you will need to provide 5 percent or more of your own money. These rules will typically be the case with second homes as well.It is vital to know the restrictions on gift money when buying a home!Click To Tweet
Tax Implications For Down Payment Gift Money
For the borrower, there shouldn’t be any tax problems, but for the person who gifted the money, there could be. Married couples can jointly gift up to $30,000 for any purpose. This is reduced to $15,000 for single-family members without gift tax becoming payable. Any sums of money above these figures will be liable for taxation in any single year.
You should make sure the gifter understands the tax implications of gift funds if you want to avoid problems within the family.
What You Should and Should Not Do With Down Payment Gift Funds
What you should do with gift monies:
- Get a signed gift letter from the donor
- Make sure there is documentation of the gift money
- Get the down payment gift in advance, so the money is seasoned
- Understand how gift monies work for tax purposes
What you should not do with gift monies:
- Lie to the lender about a loan being a gift
- Add or change funding amounts without an explanation
- Not check with the lender on gift money restrictions
Alternative Ways to Raise the Down Payment
If you aren’t lucky enough to have some of the down payment gifted to you, there are other things you can do to find the money.
There are some down payment gift assistance programs that could help. If you meet the requirements, you might be able to get up to 7 percent of your down payment funded through such a program. These programs can be offered by state housing associations or private organizations in your area.
Increasing your down payment funds could be as simple as selling some of your possessions or getting extra work. You could even start a side hustle business to increase your income and save for a home faster.
Other Valuable Mortgage and Financial Resources
Use these additional resources to make sound decisions before, during, and after purchasing a home.
- What does Credit Karma do – one of the excellent tools available for anyone who is interested in improving their credit standing is Credit Karma. They provide assistance for anyone looking to make smart credit decisions. See all the services they offer in the article.
- How to get your free credit report – if you are going to be purchasing a home, one of the smarter things you can do is get a hold of your credit report. Doing so is very easy and free! See what you need to know about acquiring your credit report from the three credit reporting agencies.
- Frequently asked mortgage questions – if you are like most buyers, you like to have answers to popular mortgage questions, especially if you have not purchased a home for an extended period of time. See the questions and answers to many of the most asked mortgage questions.
Final Thoughts on Down Payment Gift Letters
Using down payment gift money can be a great tool in becoming a homeowner. First-time home buyers, however, need to be familiar with the enormous financial responsibility of becoming a property owner. It is not just about down payment funds but the ongoing ability to keep up not only with mortgage payments but all of the associated costs involved with homeownership.
Hopefully, you have found this guide to down payment gifts helpful.
About the author: The above Real Estate information about house purchase down payment gifts was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 33+ years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.