What to Know Before Gifting a Down Payment

What to Know Before Gifting a Down Payment

Before giving money for a down payment, consider the tax implications and paperwork requirements

Buyers looking to snatch up property before prices and interest rates rise throughout the country may look to relatives for help. According to the National Association of Realtors 2012 Profile of Home Buyers and Sellers, 14 percent of all homebuyers and 24 percent of all first-time buyers received a gift to help them cover a down payment. The fact that it's a gift doesn't affect a borrower's interest rate; however, the borrower must still demonstrate adequate income to qualify for a mortgage. Mortgage lenders typically allow gifts from relatives on down payments for an owner-occupied residence – not an investment property – but a gifted down payment typically involves extra paperwork.

Understanding Underwriting

Underwriting refers to the process in which your lender looks at your credit score, income and assets to determine how risky it would be to lend you money. When underwriters look at your assets, they check to make sure that the money in your account is indeed YOUR money – that is, they want to make sure any large deposits in your account are gifts, not loans, from your friends and family. This is essential to ensuring that you can actually afford your mortgage payment and that you’ll be likely to pay the loan back. If you used a personal loan to qualify for a home loan, chances are you’d be left with a big financial mess once you had to start paying both loans back.

Gift Letters

If you’re using gift money as part or all of your down payment, you’ll need the donor to write a gift letter to your mortgage company that makes it clear that the money is a gift and not a loan. Here’s what your gift letter should include:

The donor’s name, address and phone number

The donor’s relationship to the client

The dollar amount of the gift

The date the funds were transferred

A statement from the donor that no repayment is expected

The donor’s signature

The address of the property being purchased

Gift Money and Your Loan Type

One thing to consider is that the amount of gift money you use in relation to how much of your own money you put down may impact what kind of loan you can get. Here are some rules about gift money as it relates to different types of loans.

Conventional

If you put down 20% or more, it can all be from a gift.

If you put down less than 20%, part of the money can be a gift, but part must come from your own funds. This minimum contribution varies by loan type. You can only use gift money on primary residences and second homes.

FHA and VA

All of your down payment can be gift money.

You can only use gift money on primary residences.

Keep in mind that these rules are subject to change based on lending laws – so check with your mortgage company for up-to-date guidelines.

Timing

A 60-day history of assets for qualification purposes. As long as you have documentation for the past 60 days, your mortgage company can take it from there.

Amount

So within that 60-day period, which deposits do you have to worry about getting a gift letter for? Grab your wedding veil and jump into this hypothetical situation with me for a moment.

Information for the giver

As you’re talking with a family member about the possibility of using a down payment gift, be sure that family member considers federal gift tax regulations. If you get a very large gift from a family member, that giver may need to pay a special tax on the amount.

Buying a home is much easier when you have a bit of help, especially when it comes to saving for a down payment. With these tips, you can use a gift as part of your down payment with no problems.